Do I Need Collision Coverage on My Insurance Policy?
Weigh the costs vs. the value of your vehicle
Selecting your insurance coverage is an important part of setting up and purchasing an auto insurance policy. It can be confusing to navigate all the different types of coverage, though.
One of the most important decisions you'll face is whether or not you should purchase collision coverage on your vehicle. Collision coverage protects your vehicle against physical damage losses involving other vehicles, potholes, or other inanimate objects. It's helpful to have, but not always necessary. Learn more about when it's important to have collision coverage and when you can go without.
What Is Collision Coverage?
A collision policy covers the costs of repairing or replacing your vehicle after a collision with objects such as another car, tree, mailbox, or pothole. It also covers damages if you roll your car, but does not pay for general mechanical failures. A collision must be involved. With a collision policy, your insurance will pay for the costs to repair or replace your vehicle (whichever is cheaper) minus your deductible.
Is Collision Coverage Required?
Car insurance laws vary from state to state, but no state requires drivers to carry collision coverage as part of its minimum requirements. Collision coverage is optional according to state laws.
The Exception—When You Have a Loan
The only time that collision coverage is typically required is when you have a loan on the vehicle. The lender wants to protect its interest and it does so by requiring collision coverage on the vehicle at all times. If you choose not to purchase collision coverage, the lender will purchase collision coverage to protect itself—and charge you for the insurance.
Having the lender purchase the coverage for you is usually more expensive than purchasing it on your own.
Lenders get correspondence from insurance companies if they are listed as a loss payee on a particular vehicle on a car insurance policy. If you were to remove coverage or cancel the policy on the covered vehicle, your insurance company will probably notify your lender.
Counting the Costs of Collision Insurance
If you do not have a loan on your vehicle, the choice of collision coverage or no collision coverage is up to you. You have to weigh your circumstances to determine whether you could cover the loss of your vehicle after a collision yourself or you would need help from a third party such as an insurance company.
Calculate the value of your vehicle by using Kelley Blue Book or the National Automobile Dealers Association. Knowing what your vehicle is worth will help you gauge if the cost of collision coverage is worth the potential payout. Ask your insurance agent or check your declarations page to determine the cost of collision coverage. Compare what this is costing you each year to what it would save you if you were in a collision.
The value of your collision insurance is, at the most, the current value of your vehicle minus your deductible and the cost of your premium. So, if you pay $250 every six months and your policy has a $500 deductible, then your coverage on a $5,000 vehicle is really only worth the maximum payout of $4,250.
Evaluate Your Risk of Being in an Accident
Once you know the real value of your policy, you can weigh what you're paying for against your chances of being in an accident. Do you drive your car minimally? Have you been driving 10-plus years without ever being in an accident? Your driving history is a good indicator of the likelihood of a future claim. If your risk is low, dropping collision coverage could be a great way to save some extra cash.
Another thing to consider is that in most states, you can get your vehicle repaired if the accident is not your fault and you know who caused it by filing a claim against the at-fault vehicle's policy. If the at-fault driver does not have insurance, then your collision insurance will step in to repair or replace your car. Also, collision coverage applies when you are at fault in the accident or you were involved in a hit-and-run accident.
Michigan drivers have a different set of rules to consider and probably will not want to make the decision of dropping collision coverage lightly.
Collision Coverage vs. Comprehensive
Insurance terms can be confusing, and it's not uncommon for someone to confuse collision coverage with another common type of auto insurance: comprehensive coverage. A comprehensive policy covers damage to your vehicle from very different sources than your collision policy, however.
Comprehensive coverage is designed to pay for damages to your car resulting from severe weather, fire, vandalism, fallen objects, or theft. It also typically covers your vehicle if you hit an animal or break your windshield. Collision coverage only covers damages due to a collision with another vehicle, inanimate object, or pothole.
Comprehensive coverage is usually much less expensive than collision, so it may be worth keeping longer than collision coverage would be. However, the same test of policy value vs. cost will apply as your vehicle depreciates.
- Collision coverage is an important type of insurance for your vehicle, but it's not always essential or even required.
- No states require collision coverage, but your lender likely will if it holds a lien against the vehicle.
- If you don't have a loan, you should weigh the cost of your policy (including any deductible) against the value of your car to decide if it's worth keeping collision coverage.