Don't worry, it only involves a little simple math
No matter how old your car is, you need collision insurance if you have an auto loan or lease. But what if you're not leasing your vehicle, and your loan is paid off?
Collision insurance isn't required by law in any state, but it can provide valuable coverage if you're in an accident. Whether it's worth the price depends on multiple factors, including what you can afford to pay for repairs, your car's value, how much it would cost to fix, and more.
In this article, we'll show you a few things to consider to help you decide whether having collision insurance on an older car makes sense. But first, let's look at how it can protect you.
Why is collision insurance important?
Collision insurance can help cover vehicle repair or replacement costs if you're in an accident with another car, get hit by an uninsured driver, roll your vehicle, or collide with a fixed object like a telephone pole or mailbox. But if you're in a crash and don't have collision coverage, the insurance company won't help. You'll have to pay out of pocket to fix your car.
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How much coverage do I need?
When you buy collision coverage, you don't select policy limits like you do for liability coverage. Instead, the insurance company agrees to pay for repair or replacement costs up to your car's actual cash value at the time a covered incident occurs.
For example, if you get into an accident and your car's worth $17,000, they'll pay for up to $17,000 in repairs (minus your deductible). But if the car's only worth $5,000, they'll pay for up to $5,000 in repairs (minus your deductible).
When should you get rid of collision insurance?
Deciding whether to hang onto collision coverage can be tricky. And you may be surprised by the things that shouldn't necessarily influence your decision.
"Age used to be a factor. Mileage used to be a factor. But some cars hold their value," says John Espenschied, agency owner, Insurance Brokers Group. So, that's no longer a good way to decide whether to keep collision insurance on an older car.
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For example, if your car's 10 years old, but it's still worth $10,000, it's probably worth paying a couple of hundred dollars a year for collision coverage. On the flip side, if it's seven years old and only worth $3,000, keeping collision may not make sense.
Run the numbers
If you keep your car long enough, there will come a time when you need to ask yourself if maintaining collision coverage is worth the cost you have to pay for it year after year. And don't forget about your deductible.
If you need to file a collision claim, you have to pay your deductible before your insurance coverage kicks in. When the cost of the premium plus your deductible is close to the value of your car, it might not be worth having anymore.
For example, let's say your collision coverage has a $1,000 deductible, and your premium is $400 a year. If you need to file a claim, you'd be paying a total of $1,400 out of pocket. If your car's value is $2,000, the insurance company will only pay up to $1,000 for repairs ($2,000 value -- $1,000 deductible). In that case, collision coverage probably isn't worth it.
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But let's say that instead of $2,000, the value of your vehicle is $7,500. In that case, the insurance company will pay up to $6,500 ($7,500 value -- $1,000 deductible) for repairs. So, it's likely worth paying the premium for the additional protection.
How do insurance companies determine a car's value?
If your car is totaled in an accident and you have collision coverage, the insurance company will reimburse you for the actual cash value of the vehicle immediately before the accident. To determine the car's value, insurers look at multiple factors, including the make, model, age, mileage, options, and wear and tear.
Espenschied says most settlements go smoothly, but if you're unhappy with the insurance company's offer, he recommends negotiating. "You want to make sure you scrutinize the value based on the features or options you have on that car. And look at retail prices locally."
If you can't buy a similar car in similar condition for what the insurance company is offering, let them know. And explain what similar cars are selling for in your area. To find out your car's fair market value range, check KBB's tool that lets you enter your car's year, make, and model.
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The point of negotiating isn't to get a Lamborghini to replace your Ford, (F) it's to make you whole again. If you're unable to reach an agreement, let the insurance company know you want a third-party appraisal.
"Most personal auto policies have an appraisal clause that says the insurance company is required to hire a third-party appraiser...to show how they arrived at [the settlement amount]," Espenschied said.
How much does collision insurance cost?
The average cost of collision coverage is almost $300 a year, according to the Insurance Information Institute. But insurance companies determine premiums on a case-by-case basis. And the cost can vary significantly based on multiple factors, including:
According to Espenschied, one of the biggest factors that affects your collision premium besides your age and vehicle type is your credit score.
"Credit goes to the responsibility of the individual. They've proven that [a lower credit score] is one of the factors of inattentive driving."
"If you feel that your rates are on the high side, I would recommend shopping around at least every couple of years. Don't feel obligated to stay with a particular company. All carrier rates go up and down [over time]," Espenschied said.
This story originally ran on KBB.com
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