Collision auto insurance helps cover damages to your vehicle when you are at fault for an accident or the other driver has no insurance. In most cases, the insurance company compensates you for the book value of your vehicle minus the deductible for a total loss. However, as your vehicle ages or your finances change, you may reconsider collision insurance. Here are some factors that will help you determine whether or not to drop collision insurance.
Age and Value of Vehicle
The following questions can help you decide to keep collision insurance or not:
- Do you pay more than 10% of your vehicle's book value for annual collision insurance premiums? For example, if your vehicle is worth 4000 and you pay $400 in premiums, it may be time to drop the extra coverage.
- Do you have ten times the value of the premium in a savings account to pay for a replacement? If you have that much in savings, you could consider dropping collision. However, if you live paycheck to paycheck, you may prefer to keep the extra coverage.
- Is your vehicle more than ten years old? Vehicles more than a decade old usually don't have adequate value to warrant extra coverage. However, classic vehicles could increase in value.
Some lenders and car dealers require that you have collision insurance to protect their investment. Until you pay off the vehicle, you should keep collision coverage. Though you have the right to drop it, the dealer could find out and start charging you for forced place insurance.
Forced place insurance protects the lender in case you get into an accident without collision coverage. Many lenders will demand that the entire balance of the car loan be paid off if you drop collision insurance.
- How often do you drive? If you don't drive over several thousand miles per year, your risk of accidents will be low. It makes sense to keep collision coverage if you drive daily or in big cities, which will increase your accident risk.
- Have you been in an accident over the last several years or filed several claims? High-risk drivers should keep collision insurance.
There are several factors to consider when deciding to drop collision insurance. Don't make a hasty decision before you study the pros and cons of doing without the extra coverage. Though state laws don't require collision insurance on your vehicle, it provides peace of mind.