When Should You Drop Collision Coverage

Auto insurance can be a large expense in a family’s budget, and it makes sense to look for ways to reduce the cost. In addition to shopping for a better deal, some car owners may look at all the coverages they’re paying for and wonder if they need them all. One coverage that often has a big price tag is collision coverage – the coverage that pays to repair or replace a vehicle that has collided with another car or object. If the owner still owes money on the car loan, the bank will require her to keep collision coverage. Once that loan is paid off, does is make sense to drop the coverage? The answer depends on several factors.

First, how much is the vehicle worth? Several resources are available to help answer this question. Check the classified ads in the newspaper to see what sellers are asking for vehicles of the same age and model. Publications like the N.A.D.A. Guide and Kelley Blue Book can suggest a starting point for determining value. Web sites like Edmunds.com offer calculators that take into account the vehicle’s mileage and condition.

How much does collision coverage cost? This information should be clearly stated on the insurance policy’s information page. Since many auto insurance policies run for terms of six months, the annual cost may be twice the amount shown on the policy. Compare the annual cost to the vehicle’s value. How many years of premium payments would equal the vehicle’s value? If the answer is a low number, dropping the coverage may make sense. Keep in mind two things: Collision premiums decrease as a vehicle ages, stabilizing when it’s several years old. Also, in the event of a total loss, the insurance will pay less than the vehicle’s value because the policy’s deductible will apply.

The amount of that deductible is also a consideration. This is the amount that the vehicle owner must pay out of pocket even when the insurance applies. If a collision destroys a car worth $3,000 and the policy features a $500 deductible, the most the insurance company will pay is $2,500. Therefore, an accurate estimate of the cost of collision coverage must include both the premium and the deductible. The premium decreases as the deductible increases, making the insurance more affordable and the loss less so.

Perhaps most important, the vehicle owner must determine what she can afford to pay out of pocket if a loss occurs. If she has a sizeable emergency fund in the bank, she may decide to skip the coverage and add the savings to the fund. If savings are skimpy and buying a replacement vehicle unexpectedly would present a financial hardship, keeping the coverage may be more prudent. Dropping the coverage also imposes other costs on the owner, such as time spent finding a replacement and negotiating its purchase, finding alternate transportation in the interim, and possibly renting a substitute.

Finally, dropping the coverage may mean the loss of associated coverages. For example, some companies offer rental reimbursement and towing and labor coverage only to customers who buy comprehensive and collision coverage. Some companies may also offer other benefits like “concierge” claim service to those customers. The vehicle owner must decide how important these are to her before she makes her decision.

Ultimately, each vehicle owner must decide how much financial risk she can bear on her own versus the certain cost of the insurance. An insurance agent can provide information on alternative deductibles and offer guidance. However, only the owner can decide whether the cost of the coverage is worth the potential benefit.

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