Should You Drop Collision Insurance? When To Make The Switch

Collision insurance is a type of coverage that helps pay for vehicle repairs or replacements if you crash into another vehicle or object, such as a tree or guard rail. It's usually required by lenders or leasing companies to protect their investment, but it's optional if you own your car outright. So, when is it a good idea to drop collision coverage?

Consider dropping collision insurance when:

- Your vehicle is paid off and its value is low.

- You rarely use your car.

- You can afford to pay for repairs out of pocket.

- You have another policy that covers your vehicle.

- Insurance premiums exceed 10% of your car's value.

However, it's important to weigh the risks before dropping collision coverage. Collision insurance can provide valuable protection if you're in an accident, especially if you can't afford to pay for repairs or if your car is essential to your daily life. It's also beneficial if you live in a state with a high percentage of uninsured motorists.

When you rarely use your car

If you rarely use your car, it might be worth considering dropping your collision insurance. Collision insurance covers the cost of repairs to your car if you collide with another vehicle or object, such as a tree or guard rail.

Collision insurance is typically required by lenders if you are still paying off your car loan or leasing your vehicle. This is to protect their assets if you are involved in a crash. However, if your car is paid off, you have the option to drop collision coverage.

• The value of your car: If your car is not worth a lot, it might not be worth paying for collision insurance. Consider the cost of parts and repairs before making a decision. If your car's value is less than a few thousand dollars, collision coverage may not be worth carrying, especially if you have a high deductible.
• Your ability to pay for repairs: If you can afford to pay for repairs out of pocket, you might not need collision coverage. However, if you cannot afford expensive repairs, keeping collision coverage may be a good idea to avoid unexpected costs.
• The safety of your driving and the roads: If you are a safe driver and unlikely to cause an accident, you may not need collision coverage. On the other hand, if you drive on dangerous roads, collision coverage can help reduce your risk.
• The cost of the premium: Compare the price of the premium with the current market value of your vehicle. If your annual insurance cost is over 10% of your car's value, it might not be worth taking out collision coverage.
• Your driving habits and history: Consider your driving habits and history when deciding whether to drop collision coverage. If you have a good driving record and your car is equipped with safety features, you may be less likely to need collision coverage.
• The frequency of covered events in your area: Comprehensive coverage, which is often sold together with collision coverage, protects against events outside your control, such as natural disasters or collisions with animals. If these risks are low in your area, you may be less likely to need collision coverage.

Ultimately, the decision to drop collision insurance when you rarely use your car will depend on your specific circumstances, including the value of your car, your financial situation, and your driving habits and history. It is important to carefully weigh your options and consider the potential costs and benefits before making a decision.

When your car's actual cash value is low

• Depreciation and Market Value: Cars depreciate over time, and the market value of your vehicle may be lower than what you paid for it. Factors such as mileage, wear and tear, and the age of the car model can contribute to a decrease in its worth. If the cost of repairing potential post-accident damage is similar to or exceeds the current value of your car, it may be time to reconsider your collision coverage. You can use resources like Kelley Blue Book to determine the current value of your vehicle.
• Insurance Premiums: If the annual cost of your collision insurance exceeds 10% of your vehicle's value, you may want to consider dropping the coverage. This is especially relevant for older vehicles where the insurance costs may not justify the protection offered.
• Repair Costs: If you can afford to cover repair costs out of pocket, dropping collision coverage may be a viable option. This is more applicable if you have an emergency fund or credit cards that can handle unexpected expenses. Additionally, if you have a habit of saving or investing, paying for repairs directly may be more cost-effective than paying monthly insurance premiums.
• Deductibles: Evaluate whether the expected repair expenses are less than your deductible. If you have a high deductible and the projected repair costs fall below this amount, maintaining collision coverage may not be financially prudent. It is advisable to assess the average cost of collision repairs for your specific car model and compare it against your chosen deductible.
• Replacement vs. Repair: If you would prefer to buy a new car instead of repairing a heavily damaged one, collision coverage may be less important to you. In such cases, setting aside the money you would have spent on premiums for a newer car purchase could be a smarter financial decision.
• Age and Value of the Car: Newer or more expensive vehicles often warrant continued coverage. On the other hand, older cars with diminished value and increased vulnerability to significant damage may not justify the need for collision coverage.
• Risk Tolerance: Consider your comfort level with the risks associated with not having collision and comprehensive insurance. For some individuals, the peace of mind provided by insurance holds immense value and is an essential consideration.
• Loan Requirements: If you have an ongoing loan on your vehicle, lenders may mandate collision coverage as part of the contractual obligations. It is crucial to review these requirements before making any changes to your insurance policy.

Before making a decision, it is recommended to consult with your insurance agent or broker and review your policy details to ensure a thorough understanding of the ramifications and any associated penalties. Additionally, consider a gradual reduction in coverage as a middle ground, such as opting for a higher deductible initially and further reductions as your car ages.

When insurance premiums exceed 10% of your car's value

Collision insurance is a type of coverage that helps you pay for vehicle repairs or replacements if you crash into another vehicle or an inanimate object. This type of insurance is particularly useful if you are involved in a crash, as it helps cover the costs of repairs or replacements. While collision insurance is not required by law, lenders usually require you to carry it if you're leasing your vehicle or paying off a car loan.

If your insurance premiums are exceeding 10% of your car's value, it may be time to consider dropping your collision insurance. This is especially true if your premiums are higher than your car's actual cash value. In this case, you may be overpaying for coverage that offers limited benefits.

To determine your car's actual cash value (ACV), you can use the following formula:

ACV = Cost of repairs/replacement - depreciation

You can use resources like Kelly Blue Book to find out how much your car has depreciated and its fair price range. If the ACV of your car is significantly lower than the amount you're paying in premiums, it may be more cost-effective to drop collision coverage.

However, it's important to consider your financial situation and the age of your car before making this decision. Collision insurance can provide valuable protection for your finances if you're in a crash, especially if you have an expensive vehicle or can't afford to pay for repairs out of pocket. If you're still paying off your car loan, dropping collision coverage may not be an option, as lenders typically require this coverage to protect their asset.

When you can cover repair costs out of pocket

Collision insurance is a type of coverage that helps you pay for vehicle repairs or replacements if you crash into another vehicle or a stationary object. It is not required by law, but lenders usually require you to carry it if you're still paying off your car loan or leasing your vehicle.

If you're wondering whether to drop collision insurance, you should consider the actual cash value of your car and your monthly budget. Collision insurance may not be necessary if your premium is higher than your car's actual cash value, or if you can afford to pay for repairs out of pocket.

If your car isn't worth much, you might not need collision insurance. It's important to base this decision on the market value of the car rather than its age or mileage. Use a valuation tool like Kelly Blue Book to find out the fair price range for your vehicle. If your car isn't worth a lot, you'll probably want to get a new one anyway if it's written off, so collision insurance might be unnecessary.

Collision insurance is also worth reconsidering if you can afford to pay for repairs out of pocket. If your car is inexpensive to repair and you can cover the costs yourself, you might not need collision coverage. However, if you have an expensive vehicle, the benefit of having coverage probably outweighs the cost of the premium.

Even if you decide to drop collision insurance, it's important to remember that your insurance company must cover the cost of restoring your vehicle to its pre-loss condition if you're still paying off your car loan or leasing it. If they refuse to pay for the full cost of repairs, you can let the insurance company and repair shop negotiate, or accept their offer and pay the difference out of pocket. You also have the option of beginning arbitration with your insurance company or consulting an attorney.

Other Factors to Consider When Dropping Collision Insurance

In addition to the affordability of repairs, there are a few other factors to consider when deciding whether to drop collision insurance:

• The age of your vehicle: Collision coverage is generally recommended for newer vehicles, as the value of the vehicle is likely to be higher than what you'd pay for your premium and deductible.
• Your ability to afford repairs: Even if your car isn't worth a lot, you may want to keep collision coverage if you can't afford to pay for repairs.
• Your financial situation: If you're in a situation where you're living paycheck-to-paycheck, it may make more financial sense to keep collision coverage.
• The cost of your premium: If the amount you pay for premiums is high and your car is cheap to repair or replace, canceling collision coverage may be a cost-effective decision.
• The presence of other coverage: Collision coverage typically goes hand-in-hand with comprehensive insurance, which covers damages caused by non-collision incidents like natural disasters, fire, or theft. If you keep comprehensive insurance, it may still help cover some repair costs.

Ultimately, the decision to drop collision insurance depends on your individual circumstances, including the value of your car, your financial situation, and the affordability of repairs.

When you're covered on another policy

If your vehicle is insured on another policy, you won't need collision coverage. However, it's important to note that your vehicle can only be insured on a family member's policy if it is kept overnight at their address. Additionally, you should keep in mind that collision coverage is usually required by lenders if you're still paying off your car loan.

If you decide to drop collision coverage because your car is covered under another policy, it's essential to weigh the risks and benefits. Collision coverage can provide financial protection if your car is damaged in a crash with another vehicle or a stationary object. Without it, you could be responsible for paying for costly repairs out of pocket.

• The age and value of your car: If your car is newer or more expensive, you may want to continue collision coverage to protect your investment. On the other hand, if your car is older and has depreciated in value, the cost of collision coverage may outweigh the benefits.
• Your risk tolerance: Consider your comfort level with the risks associated with not having collision coverage. Some people may prioritize the peace of mind that comes with having comprehensive insurance coverage.
• Loan requirements: Review any contractual obligations with your lender. Some lenders may require you to maintain collision coverage until your car loan is fully paid off.
• The likelihood of accidents: If you rarely use your car or have a safe driving record, you may be less likely to need collision coverage. However, it's important to remember that accidents can still happen, even to the safest drivers.
• The cost of repairs: Evaluate the potential cost of repairs if your car is damaged. If the expected repair expenses are less than your deductible or you can afford to pay for repairs out of pocket, dropping collision coverage may be a more economical choice.

Frequently asked questions