Deciding how much collision coverage is right for you, or even if you need this type of coverage at all is an important step in selecting and streamlining your insurance plan. The first step is having a good understanding of exactly what this coverage does: collision coverage pays for damages to your car in an accident regardless of who is responsible it also covers your vehicle if you are accident in which other drivers aren’t involved, like if you hit a stationary object.
It’s important that you don’t confuse this with liability or comprehensive coverage. Liability coverage covers the other driver’s vehicle and comprehensive covers non driving-related damage (I.E. theft or acts of god). One great thing about collision coverage is that in the event of an accident, you’re able to make a claim on your policy immediately and have the car fixed or replaced before there is a determination of fault (which sometimes can take a relatively long time).
Collision coverage refers to covering damage to your own car as a result of any collision or accident that it sustains. Some drivers might think their standard auto policy covers collision damage, but it doesn’t, at least not to their car. The basic insurance you take out to be legal on the road will cover payments for someone else’s car, but not your own. That’s why auto insurance companies created this separate collision coverage option that drivers can choose.
The basic liability coverage that you need to legally operate a vehicle will cover comprehensive damages to a third party. It will reimburse another driver for damage you may cause to their vehicle, and it will cover things like medical payments from accidents where you are at fault. Other products like uninsured motorist coverage are liability products the drivers buy to cover themselves in case the at-fault driver doesn’t have any insurance. All of this can be quite confusing, so have a frank talk with your auto insurance representative about which specific products you need, and why. Keep in mind that with liability, you’re talking about payouts to other people that will protect you from litigation. And with collision coverage, you’re talking about insuring your own car for damages, according to its condition and worth.
The first thing that you have to do is decide if you even need to have collision coverage at all. Some common determining factors in deciding to purchase collision coverage are:
Lease agreements always require this type of coverage. The party issuing the lease may also have a requirement concerning the highest deductible that you’re allowed to carry for this coverage.
If you’re driving a new or relatively new vehicle, you’re going to want to protect the car’s value in the case of an accident. If you get in a collision that wipes out the car’s total value, you’ll be out that amount of money. That means you might be making payments on a car that you no longer own, which is a terrible situation. For that reason many lenders require this type of coverage on any vehicle that they finance.
If your car is older or has a low value, you can probably skip collision coverage altogether to save money. There is no reason to spend money protecting something that wouldn’t cost much to replace. Your insurance company would only pay out the deprecated cash value of the car anyway, which probably isn’t very much. Instead, consider insuring yourself by putting the money you would be spending on collision coverage in a special account in case you need to buy a new car. However, you should remember that you still need to carry liability coverage regardless of your car’s value.
Remember that unlike liability coverage which covers the settlement of potential damages to other people’s persons and property (which can potentially be very high), collision coverage only covers damages to your car up to its adjusted cash value. Because of this, there is no reason to purchase any coverage above and beyond the car’s resale value. Check your car’s value on a website like Kelley Blue Book to get a good idea of how much collision coverage you should carry. If you want to protect your car up to its replacement value, you should consider carrying Gap Insurance as well.
What most drivers do when pondering collision coverage is to figure out whether there is enough value in their vehicle to fix it in the case of extensive body damage or other physical damage. For example, if someone is driving a car or truck that is 15 years old, where the blue book value has depreciated below $2,000 or $3,000, they need to think about whether the cost of repairing that vehicle would be worthwhile. On the other hand, a driver who’s driving a two-year-old model in pristine condition will definitely want to cover physical damage, as the safeguards the major investment that he or she has put into buying the car. In addition, those who are leasing or financing a vehicle may be required to have collision coverage, not by law, but as part of the leasing or financing agreement, to protect the investment of the lender.
Some drivers these days are often confused by the language in their auto insurance contract, including what’s called collision coverage. Knowing more about these terms will help you make better decisions on your policy.
Think about whether it’s worth paying higher premiums for collision coverage on the car or truck you currently drive.