Is Collision Coverage a Requirement?
What is Collision Coverage?
As the name implies, if you collide with another vehicle or a fixed object, such as a fence, tree, mailbox, or traffic sign, collision is an optional coverage under an auto policy that can help pay to repair or replace your car.
It’s possible that collision coverage could also assist if another driver is at-fault in an accident with you, but doesn’t carry enough insurance to fully pay for the resulting damages.
Pro Tip: Depending on the circumstances, this scenario could also be covered by uninsured/underinsured motorist (UM/UIM). [pending link]
How Does Collision Coverage Work?
Here’s a brief example: On a rainy drive home from work one evening, you hit an unexpected water patch, which causes your tires to hydroplane. You lose control of your car, spin in the middle of the road, careening off the other side into a culvert, and strike a telephone pole hard enough to crack it at the point of impact.
After filing a claim and paying your deductible, the collision portion of your auto policy might cover:
- Towing from the scene of the accident
- Storage at a facility
- Damage to your vehicle
- The telephone pole, including charges to replace and/or rewire, if necessary
- The damage you caused to the culvert, which required professional re-trenching to drain properly
Unlike liability coverage, collision isn’t required in any state, despite its potential importance. However, if you carry a loan on your vehicle or lease it, the lender will almost certainly require that you also carry comprehensive and collision coverage.
Why? According to Michael Steele, IHS Insurance Group’s principal owner, one big reason is that collision coverage protects their financial interests. Without it, “you could be thousands of dollars upside down on your car at the time of a total loss and unable to pay the difference out of your pocket,” he explains, “leaving the bank footing the bill.”
For this reason, your lender or leasing company will always want to be listed on your policy, which lets them know if it were to ever lapse for non-payment, or otherwise cease covering your vehicle.
How Much Does Collision Coverage Cost?
How much you’ll pay for collision coverage under your auto policy depends on many different factors, such as your vehicle (including its cost new, replacement cost, performance classification, and primary driver), the deductible you choose (more next), the state in which you live, and any accidents and violations held by you or other drivers on your policy.
With this said, according to an Insurance.com rate analysis, the average premium for collision coverage is $596 per year or about $49.66 per month. And if you file a claim under collision, you could reasonably expect this portion of your auto insurance to increase once your policy renews.
This is one reason why Michael Steele recommends to clients that if their total damage is less than your collision deductible, they might consider avoiding filing a claim. Otherwise, they’ll still be out of pocket, while their rates could still increase since the carrier is aware of what happened.
How Can You Choose Your Collision Deductible?
The collision deductibles available to you will vary by carrier, although they typically range from $0 to $2,500 and have an inverse relationship with cost. In other words, the higher your collision deductible, the lower your premium will likely be, and vice-versa.
As such, choosing the right collision deductible will primarily revolve around balancing your monthly costs versus what you’ll have to pay in the event of a claim. As an admittedly simplistic example, increasing your collision deductible from $500 to $1,000 won’t necessarily save you $500 in yearly premium costs.
However, if you file a claim and can’t afford to pay a $1,000 deductible, it might be best to choose a lower option that’s still within your optimal budget.
Pro Tip: Keep in mind that you’ll pay a collision deductible for each incident. So, if you have three accidents in a year, you could pay three different collision deductibles.
How Can You Decide Whether or Not You Need Collision Coverage on Your Auto Policy?
As discussed earlier, if you have a loan or lease on your car, the lender will require that you carry collision coverage. From there, it’s mostly about choosing a deductible that remains affordable to you every month, and that also won’t break the bank if you have to file a claim.
If a lender doesn’t require it, though, and your vehicle’s more than seven to eight years old, you can run some quick math to determine if it’s financially feasible to carry collision coverage:
First, take your car’s current cash value (Kelley Blue Book can be a quick and easy resource for this) and subtract the deductible amount. Example:
$8,000 (car value)
– $1,500 deductible
Then, subtract from this number the total cost of collision coverage for your policy’s term, which will show you the highest possible payout you’d receive if your car was involved in an accident and totaled by the carrier. Example:
– $660 ($110 monthly premium x 6 months)
$5,900 = the highest possible payout you’d receive in the event of a total loss
Since this is a relatively large sum, it might make sense to maintain collision coverage on your vehicle, unless you could afford to pay all of it out of pocket. However, if the number was negative (or meaningfully smaller), collision coverage might not make sense.
How Can You Learn More About Whether or Not You Need Collision Coverage on Your Auto Policy?
Here’s the fact: IHS Insurance Group has helped drivers like you determine their coverage needs, while remaining within budget, for more than a decade. We’re here to serve you and make sure you’re as informed as possible about all auto coverages, including collision. Reach out today, and we’ll be happy to help!
Need a FREE Quote or have questions regarding Collision Coverage? We have three convenient ways to reach us:
- If you prefer to talk to a licensed agent directly, please call (866) 480 5063.
- If you prefer to fill out a quick form and have an agent get back with you at your convenience, use the GET A FREE QUOTE.
- Lastly, for those that want an immediate quote, please click HERE.
We look forward to speaking with you today!