3 Things to Remember Before You Drop Collision Coverage

Thanks to inflation, you’re probably considering ways to save money. And as you pore over your household budget and expenses, you might be looking at your car insurance premiums. Monthly insurance payments can be a hefty expense, especially if you have a less-than-perfect driving record or a teen driver on your policy. And when you look at each aspect of your policy, you might see that collision coverage is a substantial portion of your payment. But before dropping your collision coverage, you should weigh a few considerations.

What is collision coverage?

car insurance collision coverage
Drivers inspect the damage after a fender-bender | Frederic J. Brown/AFP via Getty Images

First, what exactly is collision coverage? It’s probably been a while since an insurance agent last walked you through your policy, so you can be forgiven for not remembering. Collision coverage covers the cost of repairs to your vehicle (minus a deductible you pay) when another vehicle hits your car. Collision insurance does not cover the damage you do to another vehicle. That’s covered by property damage liability insurance, often referred to as liability insurance. Most states require motorists to have a minimum amount of liability coverage to operate a vehicle legally.

If you’re looking at your policy and see comprehensive coverage, you might wonder what it is and why collision insurance is separate. After all, doesn’t comprehensive mean all-encompassing? Well, despite the name, comprehensive coverage covers any damage to your vehicle that isn’t caused by a collision. So, if hail falls on your car or someone steals your catalytic converter, your comprehensive insurance coverage would kick in to cover the repairs.

Financed and leased vehicles require you to carry both collision and comprehensive insurance. However, unlike liability insurance, comprehensive and collision coverage are no longer required when your car is paid off.

But before you drop collision coverage, Erie Insurance recommends you consider a few factors. Ask yourself these three questions:

1. How much money do I have on hand?

Remember, collision coverage covers the cost of repairs to your vehicle. If you own your car outright, have a hefty savings account, earn a healthy income, and don’t mind paying out of pocket for your repairs, collision coverage might not be necessary.

Plus, if you drive carefully, rarely, or in low-traffic areas, the risk of a collision might be minimal. Therefore, it might be wise to drop a regular monthly cost if the probability of significant collision-related repair costs is nil.

But if you don’t have cash on hand to pay for repairs, it’s wise to hold on to this insurance coverage. Even if you have plenty of money in your savings account, keeping collision coverage might not be a bad idea if you live in a heavily populated area where you drive frequently. The higher your chance of getting into a car accident, the better off you are keeping your coverage. You certainly wouldn’t want to be late on other financial obligations, such as rent/mortgage, utilities, or phone service, because of a fender-bender or a major repair.

2. How much is my car worth?

Insurance companies generally won’t pay for repairs that exceed the car’s value. So if your body shop thinks your car’s door, bumper, and windshield damage will cost $2,000 to repair, but your car is worth only $1,000, your vehicle will be declared a loss when you file an insurance claim.

If your insurer declares your car a loss, it will pay you the vehicle’s book value. If your car has depreciated considerably over time, you own it outright, and its book value is low, you also might benefit from dropping collision coverage.

After all, if even a relatively minor repair will cost you as much as your car is worth, you might as well save $30 to $50 a month in collision coverage and put that money toward the down payment of a new vehicle.

3. How much does full coverage cost?

Again, if you own your car outright, you’ll likely want to consider how much full coverage costs. Compare your annual insurance premium to your car’s book value and deductible. If the latter is low, there’s probably little reason to pay extra for collision or comprehensive coverage.

Talk with your insurance agent. And although no state requires collision or comprehensive coverage, it might be a job requirement. Examine your employment contract, and ensure you’re not required to carry specific types of auto insurance to keep your job.

And before you drop comprehensive or collision coverage, take one last look at your finances. Ensure your savings and income are secure enough to absorb any possible unexpected costs. But if you can cover the repair costs of your vehicle or plan to get a new car anyway, it might be time to drop your collision coverage.

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