You have a lot of decisions to make when purchasing auto insurance, one of which is whether or not to purchase collision insurance. It’s generally required if you lease or pay off your car, but once that’s done, you’ll need to decide whether to keep it or drop the coverage.
Collision insurance coverage usually helps repair the damage to your vehicle if you are involved in a car accident, but it’s not always worth it. If your car isn’t worth much in relation to the amount you pay for the coverage, it may be cheaper to just drop it altogether.
Learn more about how collision insurance works and whether it’s worth it for you.
See how much you can save on your car insurance
What is Collision Insurance?
Collision insurance is a type of car insurance policy that helps cover the cost of repairing your car after an accident, whether you were responsible for it or not. It covers damage caused by hitting another vehicle or even a stationary object, such as hitting a tree or lamp post.
It is usually purchased alongside liability insurance, which covers property damage and medical bills for other parties if you are found guilty of an accident.
Oddly enough, collision insurance does not cover damage caused by hitting a deer or other game. That’s covered by comprehensive insurance, another type of coverage that covers events such as theft, vandalism, fire, weather, and animal accidents.
If you lease your car or pay off a car loan for it, you probably don’t have much of a choice when it comes to paying for collision coverage. Most lenders will require you to purchase collision and comprehensive coverage in addition to liability coverage because they still have an ownership interest in your car.
Once you pay it off and own the car for free and clear, you can choose whether or not you want to keep collision insurance.
Depending on your state, you may also need to purchase uninsured motorist coverage.
How collision insurance works
As with most types of insurance, collision insurance usually has a deductible. This is the amount you must pay before your cover starts. After that, your insurer will cover any additional damage up to the actual cash value of your car and the limits of your policy.
For example, if you have a $500 deductible and you spend $2,000 getting your car repaired after someone hit you on an icy road, your insurer will reimburse you $1,500. If you are not at fault, your insurer can cover the damage without you paying the deductible. Or if you paid the deductible, it can send you a check.
A higher deductible results in lower insurance costs but higher out-of-pocket costs.
How much is collision insurance?
Collision insurance costs an average of $290 per year, according to the Insurance Information Institute. It is usually available as an a la carte option with the must-have auto insurance policy in every state.
The actual cost of collision coverage depends on many factors:
Where you live
How old are you
Your credit score
Your driving record
The age, make and model of your car
How much deductible you choose
For example, collision insurance may be cheaper for an older car than for a new car. In addition, the premiums of policies vary enormously between insurers. That’s why it’s always a good idea to look for the best auto insurance rates every time your current policy renews, as you could save a ton of money if another insurer offers better rates.
Is Collision Insurance Worth It?
The truth is, collision insurance isn’t always worth the cost. You may have heard that it’s not worth carrying for older vehicles, and that may be true, but not always. Instead, it comes down to the math, the value of your vehicle and your personal comfort level. This way you can check whether it is time to drop the collision insurance.
Step 1: How much will collision insurance cost you?
We start with a cost-benefit analysis. To figure out how much it will cost you, you need to add two numbers together: your annual premium and your deductible.
For example, if your annual collision coverage premium is $290 per year and your collision deductible is $1,000, then your insurance cost, should you ever have to make a claim, would be $1,290.
Step 2: How Much Do You Get When You File a Collision Insurance Claim?
Then we calculate your potential benefits. To do this, you need to subtract your deductible amount from the current actual cash value of your car.
This is not necessarily what you paid for your car; it’s how much your car is worth today if you were to sell it. It’s a good idea to check the value of your car against a number of sources to get a good idea of its value, such as Kelley Blue Book and Edmunds.
For example, if the actual cash value of your car is $5,000 and your collision deductible is $1,000, then the maximum payout you would receive in the worst case of an accident, such as a total loss, is about $4,000. This is the “benefit” part of the cost-benefit analysis.
Step 3: Compare the insurance cost with the potential benefit
To see if the calculation is correct, compare the insurance cost you calculated in step one with the insurance benefit you calculated in step two:
When the costs exceed the benefits: Collision insurance is not worth it. You pay more for the insurance than you would get if you had to file a claim.
When the costs are less than the benefits: Collision insurance may be worth it. In the worst case, you will receive a larger cash payout than you paid into the system.
Continuing our example, you pay $1,290 for collision insurance, and if you have to make the maximum allowable auto repair claim, you get $4,000 back. In this case, it’s probably worth getting the insurance because you may get back more than you pay.
Step 4: Think about your comfort level and savings account
It’s good to know the numbers behind big financial decisions, but it’s also important to consider how much savings you have and even how you’re feeling.
For example, if your collision insurance cost were $2,000 and your maximum benefit was $2,100, you would potentially only save yourself $100. And even then, that’s only if you made the maximum possible claim.
In that case, is it really worth paying $2,000 for collision insurance when you might save $100? How about $500? $1,000? $5,000? The answer depends on your personal comfort level and how much you have in your emergency fund to pay for auto repairs not covered by insurance.
How to save on collision insurance
There are several things you can do to lower your car insurance premium. Here are a few ideas:
Drive safely. The more things you have on your driving record, the more your insurance will cost. Drive safely and you will be rewarded in more ways than one.
Shop. Different car insurance companies charge different rates for each type of car insurance. Get rate quotes from as many companies as possible, or find an insurance broker to do the shopping for you.
Look for discounts. Most auto insurance companies offer many discounts that can save you money. Ask about these discounts when you receive a car insurance quote.
Increase your deductible. The higher your deductible, the lower your premium – but keep in mind that this will still affect your overall cost of insurance if you need to make a claim. Most financial experts recommend choosing the highest deductible you can afford to pay out of pocket.
Work on your credit score. Auto insurance rates are often tied to your credit score. Working on growing your credit score will also save you money on insurance and other financing costs.
Reassess your insurance needs with each renewal. You may be paying for collision insurance today, but the next time you go to pay your bill, the calculation may have changed. Just like when looking for new insurers, each time you renew, check to see if your current coverage still makes sense.
Frequently Asked Questions
Is hull or collision insurance better?
One is not necessarily better than the other. They are both useful in different cases. Collision insurance helps protect your car from damage caused by an accident, with the exception of hitting a deer and other animals. Comprehensive insurance helps protect your car from non-accident damage, such as falling trees, weather conditions, and hitting wildlife.
What is an excess?
A deductible is the amount you must pay out of pocket before your insurance takes effect. For example, if you have a $500 deductible and you end up in a fender-bender that costs $1,500 to repair, you pay the first $500 and your insurance pays the remaining $1,000.
Is it bad not to have collision insurance?
Not necessary. If you have a paid-off car and the amount you would get out of a claim is less than what you pay to have the collision insurance in the first place, then it’s not worth it.
It boils down
Collision insurance is not always required, but about 80% of drivers do carry it with comprehensive insurance. If you’re concerned about the cost of repairs to your vehicle if you’re involved in an at-fault accident, it may be worth bearing. And if your car is financed, you are obligated. It all depends on the market value of your vehicle and your personal preferences.
Regardless of the type of coverage you’re looking for, make sure you get multiple auto insurance quotes so you can find the best coverage. Our list of the best car insurance companies is a good place to start.
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