Collision insurance coverage protects you if your car hits another vehicle or object. This coverage also protects you if your car is hit by another vehicle. In most cases, you will have to pay a deductible before the collision coverage kicks in, and choosing a higher deductible generally lowers your monthly premiums. If you have an older vehicle or one with a low market value, consider dropping collision coverage and self-insuring against a potential loss.
It is always a good idea to keep an eye on the value of your vehicle from an insurance perspective. As the value of your vehicle diminishes, it makes less and less sense to carry collision coverage on the car or truck, especially if the coverage is very costly. That is because the most your insurance company will pay is the fair market value of a vehicle involved in an accident. The lower the fair market value, the less value that coverage provides. You can estimate the fair market value of your car by using an authoritative source like the Kelley Blue Book (see Resource).
Cost of Insurance
The cost of coverage obviously plays a role in your decision to keep or drop collision insurance. If the cost to insure your car against collisions is very reasonable, you might decide to retain that coverage even if the value of your vehicle is quite low. But if having collision coverage raises your premiums significantly, it might no longer make sense to keep the costly coverage. A good rule of thumb is that the cost of collision insurance should not exceed 10 percent of the value of your vehicle. If it does, it is probably time to drop the extra coverage. You can find the cost of collision insurance broken out on the declaration page you received with your insurance policy paperwork.
If you have an outstanding loan on your vehicle, you might have no choice but to continue paying for collision insurance, even if it would not otherwise make sense to do so. If you do choose to drop the coverage before your loan is paid off, it is vital that you have the money to pay off the entire cost of the loan in the event your car is totaled. The insurance company will pay you only the fair market value of the car, and you could be on the hook for the rest if the loan's balance is higher than the value of the car.
Cash Flow Considerations
If you do drop collision coverage on your car, you need to be prepared to purchase a new car or repair your existing one if you are involved in an accident that is your fault. That means you need to have the cash flow necessary to make a relatively large purchase on short notice. One of the best ways to avoid a potential cash flow crunch is to earmark the premium savings you achieve to a special account you can use to purchase a replacement vehicle.
For instance, if dropping your collision coverage saves you $100 a month, after a year you can build up $1,200 toward the purchase of a new car. As long as you don't have an accident, the money in that account can keep accumulating month after month and year after year.
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