Collision coverage is designed to provide protection in the event of an accident that is your fault, and many drivers automatically assume that they cannot afford to be without this protection. But while collision coverage does provide important protection, each car owner needs to do a cost benefit analysis to determine if that protection is really worth the cost.
When You Do Need Collision Insurance Coverage
Let us start with a look at some situations in which collision coverage really is essential. If your car is new, collision coverage provides important protection for a very valuable asset. Without that coverage in place you could be left with a loan payment, no car and no money to buy another one.
Collision coverage is also essential if you have an older car with an outstanding loan. Again, without collision coverage on your vehicle, you may not have the money needed to pay off the loan. This would again leave you with lots of debt and no way to get to work.
Things Get Trickier
While it is certainly important to have collision coverage in place when your car is new, and while you have an outstanding car loan, the decision process becomes a bit trickier after that loan is paid off. If you are lucky enough to have a car that is completely paid for, it is important to take a look at its true market value and determine if collision coverage is still worthwhile.
To get an idea of the value of your car, pick up a copy of Kelly Blue Book. This guide is routinely used by insurance companies to calculate the value of vehicles declared total losses, and chances are Kelly Blue Book is one of the resources your insurance company will use if your car is involved in an accident that renders it undriveable. Look your car up in the guide, make an honest assessment of its condition and its mileage, and use the value you see there as a guide. You can supplement the information found in Kelly Blue Book with other sources, like newspaper classified ads and the prices charged by your local lot, but it is best to err on the low end of the value range.
If your analysis shows that the true market value of your car is less than $3000, it may be time to drop collision coverage on your car. But before you make the final decision it is important to review your itemized bill one more time to determine exactly what the coverage is costing you. It is also important to make sure you have enough financial resources in place to buy a good used car, or at least put a down payment on a new one, in the unlikely event your car is totaled in an accident. Unless you have at least some money put away in an emergency fund, dropping collision coverage can be a shortsighted move, even if it would otherwise be a good idea.
Fortunately, you can use the money you save by dropping collision coverage to build on the emergency fund you already have in place. For instance, if your collision coverage is costing you $150 for a six month policy, dropping that coverage would save you $300 per year. If you have the fiscal discipline to funnel those savings into an emergency fund, you can insure yourself against the loss of your vehicle by continuing to put money aside each month.
In the end each driver will need to make his or her own decision about the coverage he or she needs. No two situations are the same, and there are no hard and fast rules for when collision coverage no longer makes sense. While the $3000 car value is a good rule of thumb, it is just that – a rule of thumb. You will need to look at your own financial situation to determine if the potential value of collision coverage outweighs the added cost.
