How Collision Coverage Works

Collision coverage will cover the cost of repairs, minus your deductible, up to the total value of your vehicle. Like all car insurance, you pay a monthly premium to have collision insurance. Typically you can elect to either pay a higher premium each month, or have a higher deductible. If you choose higher premiums, you will have a higher monthly rate but will not have to pay much out of pocket if your car is damaged. If you choose a higher deductible, you will pay a lower amount each month but will have to pay a larger amount to cover repairs before your insurance will cover the rest.

If you have money saved up and are confident that you have little chance of being in an accident, choosing a higher deductible may be a good option so that you can benefit from low monthly premiums. Alternatively, if you live basically paycheck to paycheck it may be better to take a higher monthly premium so that you will not suddenly find yourself having to pay out a large sum of money all at once if you are in an accident.

Why Drop Coverage on Older Cars?

As a car ages, it depreciates in value. This means that the value of your collision coverage also depreciates. For example, say that you have a car that is only a few years old and is worth $10,000. You are paying monthly premiums of around $40 for collision coverage, or about $480 per year, with a $400 deductible. If you had an accident with $4,000 in damage, you would receive $3,600 from your insurance company for repairs. Paying out a few hundred dollars a year may certainly be worth it to have your repairs covered in case you have an accident.

Let’s look at another scenario, where your same car is now 10 years older and worth only $2,000. You are still paying about $480 per year for collision coverage, with the same $400 deductible. Now if you had an accident with $4,000 in damage, the cost of repairs is more than your car is worth, so your car would likely be declared a total loss. In this case the insurance company will only give you $1,600 for repairs ($2,000 car value minus $400 deductible), even though it would cost another $2,000 to fix. You would be losing much of the value of your coverage on a car worth only $2,000. It therefore may be in your best interest to drop the collision coverage altogether and save that money for your next vehicle purchase.

Ultimately, the decision to drop collision coverage is up to the owner. If you feel insecure without it even on an older car, you may decide to keep it. However, once your car has lost most of its value your collision coverage may cost you more out of pocket in the long run than it is worth. Consider looking up the current value of your car and comparing this to the estimated cost of repairs if you were in an accident. If it is likely that the repair costs would exceed the value of your vehicle, dropping collision coverage may be a wise decision that saves you hundreds or even thousands of dollars.