Should You Carry Collision Insurance?

Collision InsuranceLet’s talk about collision insurance for a moment, because “should I have collision insurance” is a question people often ask when they are buying car insurance. Or if one does have collision insurance on a car, how long should they keep the collision insurance?

What Is Collision Insurance?

Collision insurance is to protect you financially in the case of an accident. While liability protects you from getting sued if you hurt someone (or pays for damages to someone else’s property), collision insurance is to fix YOUR car in the event of an accident. Hence the name “collision insurance”.

The thing about collision insurance is it’s often (but not always) an option for the buyer. More on this in a second.

Who Needs Collison Insurance?

To start, anyone who would want their car fixed if they got into an accident is a candidate for collision insurance. But this will be tied to your car’s value as well. If your car is only worth, say, $2,000, it’s not worth paying the premium for collision.

Now, I mentioned earlier, you may not have the option to forgo collision insurance. If you took out a loan for your car, the lender will almost certainly insist that you carry collision insurance. This is to protect them in the case of an accident – since they technically own the car until you pay it off, it’s their asset that’s in the shop all wrecked, and yes, they’d like it fixed, please. So anytime you take a car loan, be prepared to pay for collision insurance.

But ok, you’ve had the car five years now, and you finally reached that great day when you make your last payment. Yay – the car is now yours, and yours alone. So, should you keep the collision insurance?

That’s going to depend on your threshold for risk, and, obviously, how much your car is worth. Think about if you got into an accident, and your car had $5,000 in damage – what would you do? Without collision insurance, that bill is on you. And if you don’t want to get the car fixed, then what? You have a useless piece of smashed metal that you can sell for parts, perhaps.

You have to balance the preceding with the cost of collision insurance, plus the deductible. Collision is probably the most expensive part of car insurance, often adding hundreds of dollars to your premiums. The deductible can range anywhere from around $500 to $2,000 (and, of course, the higher the deductible, the less the premium.)

Everybody is different, but I usually keep collision insurance on my cars until they are worth less than $8,000. At that point, I’ll take the risk that if something bad happens, I’ll just buy a new car. Because I look at collision as “catastrophic” insurance, I keep a high deductible. So my thinking is, if the car is worth $8,000, and my deductible is $2,000, that’s only $6,000 difference. Collision adds enough to my premium that I don’t want to spend $2,000 plus the premium to protect $8,000. For me, paying 25% of something’s value to insure it is a bad ratio. Again, everyone is different, but that’s me.

But until that point, yes, collision is a must-have.