Car accidents happen all the time, even to the most defensive drivers on the road. No one is immune to accidents, and all you can do is be prepared in the event you’re ever in one.
Most states require that you carry, at a minimum, liability insurance on your automobile. Liability covers the costs or damage you may do to other people and property while driving. This includes bodily injury and property damage.
Collision insurance covers damage to your car when you’re in an accident. This includes a collision with another car, or a collision with a stationary object like a tree, guardrail, or fire hydrant.
Traditionally drivers choose a deductible, the amount that they will pay out of pocket, and then pay a monthly premium for their collision insurance. If you’re in an accident, you pay the deductible, and the insurance company covers the remainder of the costs up to the actual cash value (ACV) of your car or the limits of your insurance policy.
When should I drop collision coverage?
- 10% Rule: If collision coverage costs more than 10%of the actual cash value of your vehicle plus your collision deductible it might be cost effective to drop collision from your auto policy. For example, if the ACV of your vehicle is $3,000 and your collision deductible is $500, consider removing collision coverage if it costs more than $350 per year for that vehicle.
- Older Car: If your vehicle is more than 10 years old, it may no longer have enough value to warrant collision coverage.
- Rainy Day Fund: If you have 10 times your collision premium in a “rainy day fund”, you probably have enough of a cushion to put a sizable down payment on a replacement vehicle. In the example above, if your “rainy day fund” has at least $3500 in it, you might reasonably risk dropping collision coverage. If you don’t have that amount of savings, you would probably need the insurance proceeds to help you make a down payment on another vehicle.
When should you keep collision coverage?
- Loan or Lease: If you have a loan on the vehicle or you lease your car, your loan or lease contract requires you to carry collision coverage for the length of the agreement.
- One Car Household: If you only have one vehicle you should probably keep your collision coverage. A multi-car family can usually get while one car is in the body shop. But, if you’re a one car household, you’ll probably need coverage to rent another while yours is being repaired. Also, when renting a car, you’ll definitely need to buy car rental insurance if you don’t have collision coverage on at least one vehicle on your policy.
- Uninsured Motorist: If you have no collision coverage and someone hits you, it’s their fault and their insurance will pay for the damage to your car. But, if you are hit by an uninsured driver, there’s no one else to pay. If you don’t have collision coverage, you’re on your own to repair or replace your vehicle.
There is no single right answer to the question of when to carry collision coverage and when to drop it. This decision depends on your vehicle, your financial situation, how much collision insurance costs, and your own risk tolerance.
At the end of the day, you need to weigh all the variables to decide if collision insurance is right for you, and if so at what cost. Talk to the insurance professionals at Foundation Insurance Group. They are always there to review your current auto policy, answer questions, and make sure your auto insurance is right for your situation.