You aren’t the type the drive around in the latest and greatest vehicle.
Instead, you pride yourself on your savvy financial abilities by driving an older vehicle that is paid off, still runs, and saves you the hassle of monthly payments.
The one payment that you still have, however, is insurance coverage.
Plenty of financial websites will say to drop your collision coverage on your older, paid off vehicle to save money. While they boast about the savings, they are not considering your car or personal situation – let alone the law. Therefore, before you go and try to drop out a necessary component of your automobile insurance policy, you need to consider a few items carefully.
First Off: What is Collision Coverage?
Before you drop an insurance component, you need to know what you are losing. Your insurance plan has comprehensive and collision coverage, but the terms are often confused for one another. Comprehensive coverage handles damage from storms, theft, fire, vandalism, and if you were to strike an animal while driving. Comprehensive does not pay for damages in an accident. Instead, your collision pays for this part.
Collision covers physical damage when you contact another vehicle or object, including if your car rolls over. It doesn’t matter if you caused the accident or someone else, you have coverage.
Your collision does the following:
- Pays for your damage when you cause the accident;
- Steps in and covers damage when you accidentally hit a single object (such as backing into a pole); and,
- Covers while you are in dispute about who is at fault for an accident (which might take months to hash out).
Do States Require Collision Coverage?
You are not required to carry collision, but you are required to carry liability insurance. However, a car that is financed almost always has the requirement for collision, because the bank technically owns that vehicle until you pay for it.
Therefore, if you pay off your car and own it outright, it would not be illegal to drop collision, but it would be illegal to cut your liability coverage on the vehicle.
Deciding Whether or Not to Drop – Weigh the Odds
Collision is optional once you pay for your vehicle and get out from the grips of a lender. However, deciding whether to drop it or not still depends. Even a ten-year-old car costs money to repair, and if you get in a minor fender bender, do you really want to step up and pay the tab?
Before you up and drop your policy, here is what you need to consider:
Your Car’s Value
If your insurance premiums add up to more than the value of your vehicle, you could stow that premium away in a savings account, gain some interest, and not hassle with the insurance coverage. Then you have a rainy-day fund in case something does happen to your car.
Remember that insurance covers market value, and many older vehicles still have favorable values. Check a few websites and compare the market value of your car (not a trade-in or private sale value), like Edmunds or Kelley Blue Book. Then, compare that to your annual collision costs. Do not compare it to your entire insurance bill, as you will still pay liability coverage regardless.
Your Ability to Actually Save
Saying you will take your monthly or annual insurance savings and stow it away in a savings account is easier said than done. If you know you are bad at saving money, then the chances are you will not put that extra cash into a rainy-day fund as you should.
If you have poor saving habits, in an accident you are required to pay for the damage to your vehicle (and possibly replacing it), so insurance might prove to be the better choice.
On average, a driver experiences one accident every 165,000 miles. If you and your older vehicle are on the road a lot, especially in busy metropolitan cities where rear-end collision is typical, then you may want to leave your collision coverage in place. After all, a repair to your bumper might only cost a few hundred, and if your car is still worth $5,000, then it may prove beneficial.
Bottom Line: It’s Up to You and Your Wallet
After you compare how much your car is worth to your premiums and the chances of a collision headed your way, you can then decide whether dropping the coverage is right or not. However, in the end, it comes down to what you are financially comfortable with.
If your car were totaled today, insurance would pay up to market value (minus applicable deductibles), but if you can cover that amount yourself without insurance’s help, then you could put your premium savings to better use.