Collision Insurance helps you pay for repairs or the replacement cost of your car if you’re in a car accident with another vehicle or you hit an object like a tree with your car. If you’re financing or leasing a car; you’ll typically be required by the financing company to carry collision coverage. If your car is paid off; collision coverage will be optional.
Different from liability insurance which is required by law and helps pay for damages to another driver’s car from a car accident you cause. Collision coverage helps pay for damages to YOUR CAR regardless of who is at fault.
We’ll help you decide whether you need collision insurance later.
For now, let’s look at what collision insurance covers, what’s not covered, collision coverage deductibles and limits and the cost of collision insurance.
Here is a quick video explaining How Collision Insurance Works:
What Does Collision Insurance Cover?
You know that collision coverage can help pay for damage or replacement cost of your car after an accident with another vehicle regardless of fault.
But what exactly is covered?
Collision insurance will pay for repair or replacement of your car if damage is caused from:
- A Collision with Another Vehicle.
- A Collision with an object, such as a tree.
- A single car accident that involves a roll over or falling over.
- The additional cost of replacement if you’re involved in an accident with a driver who only carries the state minimum liability coverage.
Another driver who carries only that state’s minimum liability coverage of $5,000 hits your car and the damages are $20,000. The other driver’s insurance will pay the $5,000 and then your collision coverage will step in and pay the remaining $15,000 minus your deductible.
The reason lenders require collision and comprehensive coverage as long as you’re financing the vehicle is they don’t want you to be on the hook for thousands of loaned dollars if you car is totaled before it’s paid off.
What is Not Covered by Collision Insurance?
There a few things that collision insurance does not cover as they fall under your other coverage options:
- Damage to your car not related to driving (Example: A tree branch falls onto your car while it’s parked, causing $3,000 in damages. This would be covered by another optional coverage, Comprehensive Insurance, you can learn about comprehensive coverage by clicking here.)
- Damage to another person’s vehicle (Your Liability Coverage pays these types of claims)
- Medical Bills (Yours or another person’s)
“Another driver carrying only the state-required liability minimum may not have enough coverage to pay for damage they cause to your vehicle”
How Do Collision Coverage Deductibles and Limits Work?
Collision Coverage will have a deductible, which is the amount you pay before your coverage steps in, and when purchasing your comprehensive and collision coverages you’ll have the option to choose your deductible amount.
Typically, insurance companies will give you several different deductible options ranging from $250 to $2,000.
The most common deductible amounts are $500 and $1,000. However, these vary from insurance company to insurance company.
The lower your deductible amount the higher you can expect your monthly insurance premium. Raising your deductible will consequently lower your monthly premium.
While lowering your monthly insurance premium may sound appealing, it’s important to consider you will have to pay your deductible out of pocket towards any repair costs of a covered claim unless you’re enrolled in the Deductible Relief Program offered by Deductible Funding Solutions.
If you choose a $1,000 deductible and you end up rear ending another vehicle with the resulting damages to your own car totalling $2,500, you’ll need to pay the first $1,000 out of pocket and your insurance carrier will pay the remaining $1,500.
You need to consider how much you are willing and capable of paying out of pocket if you’re ever in a covered claim when determining your deductible amount.
Another aspect of collision coverage is the Limit of Coverage. The limit of coverage is the maximum amount your policy will pay toward a covered claim.
The collision coverage limit is typically the actual cash value of your car less depreciation.
Let’s use the previous example but this time rather than $2,500 in damages as before, your car is completely totaled. If your car’s actual cash value at the time of the accident was $15,000 then your collsion coverage would pay that amount minus your deductible.
IMPORTANT: If your car’s actual cash value is $15,000 and you still owe $17,000 on it you would be liable for the remaining $2,000 to the finance company. This is where GAP Coverage comes in and covers that difference if there is one.
Why Buy Collision Coverage?
We’ve talked about what is collision coverage, what it does and does not cover, and how its limits and deductibles work.
Now, let’s look at how to tell if you need collision coverage and how much collision coverage costs.
You might be thinking, “If collision coverage is optional, why buy it?”
If you owe money on your car, or if you’re leasing the vehicle, collision coverage is going to be required by the finance company. You just need to decide how much of a deductible you want and if you should enroll in a program to eliminate your out of pocket expense if you ever have a collision claim.
But what if your vehicle is paid off. Is it still worth carrying collision coverage?
For most drivers the answer is YES.
Consider whether you’re willing or even able to pay thousands of dollars out of pocket if you’re ever in an accident with another vehicle or you hit an object like a tree.
If your car is damaged or destroyed are you in a position to go out and purchase another one without financial assistance from your insurance company?
If you can’t afford to repair or replace your car then having collision coverage will give you some peace of mind.
“If your car or truck is worth less than the deductible amount, it’s not worth having collision insurance.”
Consider the fact that collison coverage will actually become less valuable over time as your car loses value. Once the actual cash value of your car is equal to or less than your deductible you should drop the collision coverage on your policy.
Another option would be to lower your deductible as the value of your car decreases. If you’re financing a low cash value vehicle and required to carry collision coverage, choose the lowest deductible amount offered by your insurance company.
Lastly, if you’re purchasing collision insurance, you’ll most likely be required by your insurance company to have comprehensive coverage as well.
We have a complete guide to understanding comprehensive insurance that explains what it is and how it works.
Please feel free to ask any questions in the comments below.
Learn More About the Deductible Relief Program and How You Can Save Thousands in Out-of-Pocket Expenses.
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P.S. If you decide that you want or need collision insurance and don’t want to be stuck paying a deductible if you’re ever in an accident I’d encourage you to look at our Deductible Relief Program. You can virtually eliminate your out of pocket expense and by increasing your deductible you could potentially do so without any additional monthly cost.