When to drop collision insurance?

Collision coverage is the first line of defense against auto accidents. However keeping it is not always practical. Read on to learn when and if you should cancel collision coverage.

This insurance policy is not obligatory when you hold the title of a car or truck (own it outright). But in case you borrow money to buy a vehicle, your lender typically requires to have collision insurance, as well as comprehensive insurance. Both are purchased as an addition to the insurance required by your state.

When to drop collision insurance

Once you purchase the car you’re leasing or pay it off you can ask yourself the following questions:

  • should I choose comprehensive insurance or collision coverage?
  • when to drop collision insurance from my auto insurance policy?

Many insurance agents recommend that you never cancel either of them. However, this piece of advice is not practical for every type of vehicle. To understand why, let’s look at the difference between comprehensive and collision options in your auto policy.

Comprehensive VS collision coverage

Both can be a bit expensive – that is the most obvious similarity between these two options. You may keep premiums down by choosing a specific deductible level (amount of money paid out of pocket in case of a collision). Deductible can vary from $250 to $2,000.

The difference between comprehensive and collision coverage is critical. Comprehensive coverage protects your pocket in case of any damage caused by nature from hail to flood or fire. Theft and vandalism coverage is also included in your auto policy if you choose comprehensive insurance.

Collision policy allows you to get coverage when your car collides with another vehicle. It also covers damage in case your car through your fault is hit by another vehicle or object, if you strike an animal, a tree, a house, etc. In some cases it is used for accidents in which you were not at fault. It doesn’t include coverage for bodily injury.

Contrary to popular belief, insurance required by your state typically does not pay for repairs of your own car if an accident is caused by you. You pay the entire amount out of pocket, and your insurer will cover the damage that is done to the vehicle that was hit.

All in all, both provide something valuable. So cancelling any of them can be an agonizing decision because if you do this you risk losing a car.

When to drop collision insurance: 10 percent rule

If your collision coverage costs 10% from the cost of your car, it’s time to drop it. This money should be better spent on your next vehicle purchase. For instance, if your coverage costs $300 a year on a $3,000 car, cancelling it would be a good idea.

Looks simple, doesn’t it? This rule works for many people. However sometimes it is not practical:

  • for those who are living from paycheck to paycheck and can’t afford to replace a vehicle in case or an accident;
  • those who are bad drivers;
  • people with low personal risk tolerance (buying collision coverage means you’re buying peace of mind).

So, it is not that simple!

6 factors to consider

  1. Your car’s value

To begin with, check the “blue book” value of your vehicle – it’s easy to do it online. Ensure that you’re realistic about mileage and condition. Your insurer will probably give you something close to trade-in or private party sale. Don’t forget that book values decline in the course of time.

If a car is worth a few thousand dollars, it is probably better to pay for repairs out of pocket. If you own a vehicle worth over $5,000, then paying your insurer can be a smart idea.

  1. Is there a loan on your vehicle?

In some states collision coverage is not obligatory even in case of a loan. And some lenders do not require it as well. But do you want to end up paying the full value of a loan with no chance to recoup much money from the vehicle (and that is what may happen in case of an accident)?

  1. How old is the car?

Typically, in no more than 4-5 years, you might be paying your insurer more than the car costs.

  1. Your risk of an accident

An average U. S. motorist gets into an accident – major one or just fender-bender – every 11 years. Chances of an accident grow if you live in a big city. Your driving style and number of miles driven annually matter as well. Young people who drive every day, live in urban areas and have a fast and aggressive driving style are at higher risk.

  1. How much does your collision policy cost?

Many insurers present information in a confusing way or don’t itemize each element of the policy, so it is not that easy to figure out an annual cost. Still it’s critical to know how much you will spend on the policy.

  1. Can you afford the risk?

If you lost the vehicle, could you recover from this easily? For those for whom a car is the most expensive asset, such risk may not be practical.

Now, as you’ve done your homework, you probably understand when to drop collision insurance.