Knowing if or when to drop auto insurance collision coverage can be tricky. It’s a question that often baffles those new to auto insurance, and understandably so. After all, isn’t that what my insurance is for – to cover collisions?
Well, yes and no. If we use state statutes for required minimum coverage as a measure, most focus on your:
- Liability for damages to people and property if you cause an accident.
- Personal injury protection or PIP to protect you and your passengers for medical expenses, regardless of who caused the accident.
- Medical and repair bills should your car-full be struck by an uninsured or underinsured motorist.
Why are these three auto insurance coverages required and collision is not? Simply put, these policies protect against three unknown and potentially very, very expensive outcomes of auto accidents.
Protections You Get From Auto Insurance Collision Coverage
The protections you get from collision coverage are confined to repairs just for your vehicle. For instance, it covers damages from hitting another car, object, pothole or even flipping over. Collision coverage has a known maximum payout: the current value of your ride.
“Collision coverage is really designed to allow you to repair the car you’ve got and keep it going as opposed to having to buy a new one out of pocket, explains Bob O’Brien, vice president of Noyes Hall & Allen insurance in South Portland, ME.
“If you don’t have enough money set aside to replace your car, collision insurance can be a good way to manage that cost. It’s a few hundred bucks a year depending on where you live. But if you don’t have a big safety cushion in terms of your bank account, then that’s a good reason to keep your coverage.”
How to Know When to Drop Auto Insurance Collision Coverage
How can you determine whether you should cancel or continue your auto insurance collision coverage? Noyes Hall & Allen came up with what they call “The Rule of Tens” to help the fence sitters amongst us:
- Ten Percent: When collision coverage costs more than 10 percent of the book value of your vehicle plus your collision deductible, it’s time to revisit it. For example, if the book value 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.
- Ten Years: If your vehicle is more than 10 years old, it may no longer have enough value to warrant insuring.
- Ten Times: 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, you would probably need the insurance proceeds to help you make a down payment on another vehicle.
Other Factors to Consider Before You Drop Auto Insurance Collision Coverage
Before you decide to drop or not, take some time to research these components:
- Book value: What’s your vehicle really worth? Don’t trust your posse or your insurance agent for the answer; instead, consult the pros at Kelley Blue Book.
- Deductible: What portion of a collision claim would fall on you to pay? If it’s a considerable chunk, it could influence your decision to hold, drop or adjust your auto insurance deductible. If budget is prompting change, it may make more sense to adjust your deductible than to drop collision coverage entirely.
- Comprehensive: This covers your vehicle for damages not caused by an accident with another vehicle, but from animals, falling trees, vandals, theft, etc. Some insurers, lessors, and lenders require you to pair collision policies with comprehensive coverage.The question is, could you best shave your premium by dropping one or both, and is that even an option?
- Risk factors: Are you a safe driver? Insurance companies base their quotes on their best guess to this question. If both you and your vehicle are of an age, it might be wise to eliminate your collision policy and use the savings to beef up your liability coverage.
Armed with the information above, O’Brien says talk to your agent about your options. While insurance agents don’t make a point to talk you out of purchasing coverage, they’re often a good choice to work through your worries and guide you to the best option for your situation.