Collision coverage is one of the most commonly purchased types of auto insurance, and for good reason. It pays to repair or replace your vehicle after an accident, regardless of who was at fault. But collision coverage isn’t always necessary for every driver.
Making the right decision about collision coverage can save you money or protect you from a major financial loss. Here’s everything you need to know to make an informed choice.
What Does Collision Coverage Pay For?
Collision coverage pays for damage to your vehicle caused by a collision with another vehicle or object. This includes accidents where you hit another car, run into a guardrail, back into a pole, or roll your vehicle. It covers the cost of repairs up to the actual cash value of your car, minus your deductible.
If the damage exceeds the value of your car, the insurance company will declare it a total loss and pay you the actual cash value of the vehicle rather than the cost of repairs. This is commonly known as being “totaled.”
How Deductibles Work
Every collision policy comes with a deductible — the amount you pay out of pocket before insurance kicks in. Common deductible amounts range from $250 to $1,000. Choosing a higher deductible lowers your premium but means more out-of-pocket expense when you file a claim.
For example, if you have a $500 deductible and your car sustains $3,000 in damage from an accident, you pay $500 and your insurer pays $2,500. If the same damage occurred with a $1,000 deductible, you’d pay $1,000 and your insurer would pay $2,000.
When You Should Carry Collision Coverage
Collision coverage is strongly recommended in several situations. First, if you’re financing or leasing your vehicle, your lender will almost certainly require it. Second, if your car is relatively new or valuable and you couldn’t afford to replace it out of pocket, collision coverage provides essential protection.
A good rule of thumb is to compare the annual cost of collision coverage to the value of your car. If your annual premium is more than 10% of your car’s value, you might consider dropping it. But if your car is worth $15,000 and collision coverage costs $600 per year, it’s generally worth keeping.
When You Might Skip Collision Coverage
If your car is older and its value has depreciated significantly, collision coverage may not be cost-effective. If your vehicle is worth only $3,000 and you’re paying $400 per year for collision coverage with a $500 deductible, the maximum you’d receive in a total loss is $2,500 — a questionable return on your investment.
Drivers with substantial savings who could afford to replace their vehicle out of pocket might also choose to self-insure against collision damage, saving money on premiums in the process.
Collision vs. Comprehensive: What’s the Difference?
While collision coverage pays for damage from driving-related incidents, comprehensive coverage handles everything else — theft, vandalism, weather damage, animal strikes, and falling objects. Together, these two coverage types provide full protection for your vehicle. They’re often referred to collectively as “full coverage,” though that term isn’t technically an insurance industry term.
Both coverages are typically required by lenders and both have deductibles, but they’re separate line items on your policy and can have different deductible amounts.
