“When do I drop collision coverage” is a very common question posed to insurance agents and for good reason. Relative to the cost of the other auto insurance coverages found on most personal auto policies (Including but not limited to At-fault liability, No-fault coverage, Uninsured motorist coverage) Collision coverage can be expensive. So it’s fairly reasonable that insurance buyers tend to focus on this expense when reviewing their auto policy.
First, let’s get an understanding for exactly what Collision Coverage is. According to the Insurance Information Institute:
Collision Coverage – pays for damage to your car resulting from a collision with another car, object or as a result of flipping over. It also covers damage caused by potholes.
Collision is a “physical damage” coverage meaning the damage done to your own vehicle. Collision does not provide coverage for any bodily injury or damage done to a human being. Collision also does not provide coverage for damage done to anyone else’s car. Physical damage to YOUR car only, remember that.
So When Is A Good Time To Drop Coverage?
Now, before you go all “Anti-Incumbent” on me I’m going to lay out some tools and rules of thumb (negative perceptions of this phrase have been discredited) that you can use in making the determination as to whether dropping Collision Coverage is a Value play for your insurance program.
Tool #1 – Kelley Blue Book Online – I’m sure most of you have heard of the Kelley Blue Book (KBB) before but if you haven’t KBB is essentially the car industry standard for determining the value of a vehicle at any given time. I’m not an auto appraiser and neither is your independent insurance agent so don’t ask us how much we think your car is worth because honestly I have no freaking clue and neither does he/she. Go to KBB and get a solid estimate…
Tool #2 – Cars.com – Similar to KBB, Cars.com can provide you with an estimate of the value of your car. This is called “doing your homework” and since its all online I encourage you to take the time.
Now that you have a reasonable understanding of the value of your car lets talk about some Rules of Thumb (with the understanding that A rule of thumb is a principle with broad application that is not intended to be strictly accurate or reliable for every situation) to consider:
Rule of Thumb #1 – More Than 8 Years Old – It is my practice to begin having conversations about removing collision coverage when cars reach ~ eight years old. I don’t have an Internet link to a creditable resource as to why this is when I tend to start having this discussion. It has been my experience thus far in my career that for many autos this is when they begin to lose significant value. If you own a Porsche Boxster, probably not true, if you own a Ford Taurus, probably true.
Rule of Thumb #2 – Are You Obligated To Hold Coverage – Another good time to look into dropping your collision coverage is when you are no longer obligated to hold coverage by the financial institution that you took a loan from to purchase the vehicle. This tends to be true for people who bought a used car. If you bought new in 2007 and you just paid off the loan probably not true.
Rule of Thumb #3 – Can You Afford Coverage – What I mean by can you afford coverage is, if you are not obligated to have collision coverage and you are on a tight budget, your insurance dollars may be better spent increasing your liability coverage rather than holding collision. Far too often it is my experience that people will skimp on Liability to pay for Collision. Insurance consumers do this because they can picture an accident happening in their head and having to deal with getting the car fixed and paying for the damage. What many people have a hard time imaging is the accident where they smear some poor kid who pops out from behind a car and now have to liquidate every asset they have to pay for the lawsuit. Basically, would the dollars you’re spending on Collision be better spent on Liability?
Here is the an equation that I go through with my insureds when I determine if they need Collision (Competing insurance professional do not read this next part):
Premium = Value of Vehicle – Deductible
Is the premium you are paying for coverage worth the value of the vehicle minus the deductible you will have to pay in the event of an accident? Quick example: say you are paying $250 a year for collision on a 2004 Dodge Stratus with a $500 deductible. The value in its current state is ~$5,000. You have to determine if:
$250 a year = $5000 – $500
That is NOT a question I can answer for you. You have to make that decision on your own as the policy owner. For some it will be worthwhile and for others it will not.
If you have a question about coverage you can email us or us the Comments box below.
Thank you and Good luck.
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