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Driving can be risky business. Accidents happen, and they can easily bring financial turmoil with them. But whether you're involved in a fender bender or a major crash, collision insurance can help. Collision insurance is coverage that pays to repair or replace your car if it's damaged when you hit another car or object while driving. But what exactly does collision insurance cover, and do you really need it? Read on to find out.
What Does Collision Insurance Cover?
As the name implies, collision insurance covers damage caused when your vehicle collides with another vehicle or an object, such as a building, telephone pole, mailbox or tree. It also covers your car against damage caused by potholes or if you roll your car.
Collision insurance is not the same as comprehensive insurance, a type of car insurance that covers damage not sustained in a crash. Many drivers carry comprehensive insurance to fill in the gaps in their collision coverage.
Collision coverage can protect you in many situations, but there are events it does not cover:
- Damage to your vehicle when you're not driving: Collision coverage only kicks in when you're driving. If a tree branch falls on your car while it's parked in your driveway, the damage to your car is covered by comprehensive insurance.
- Damage to another person's vehicle: If you hit another vehicle while driving, collision insurance only pays to repair or replace your car, not the other driver's.
- Theft: If your car is stolen, the theft will be covered by comprehensive insurance.
- Wear and tear or breakdowns: Normal wear and tear to your vehicle isn't covered by collision insurance. Neither are mechanical failures or roadside assistance, such as towing your car if it breaks down.
- Liability or medical costs: Collision insurance protects your vehicle, not people. It won't cover the cost of lawsuits from others involved in the accident or pay the cost of injuries to yourself, your passengers or the other vehicle's driver and passengers.
How Much Does Collision Insurance Cost?
In most states, drivers are legally required to maintain a basic level of liability coverage. Liability insurance covers the cost of damage or injuries you cause to others while you're driving. The cost of collision coverage will be added on to the cost of liability coverage.
If you file a claim using your collision insurance, the insurance company pays to repair or replace your vehicle, minus your deductible. Deductibles can range from a few hundred dollars to $1,000 or more. For example, suppose you have a $250 deductible and file a $1,500 claim for damage sustained in a covered crash. You'll pay the first $250 of the repair bill and then your collision insurance kicks in to pay the remaining $1,250. Some insurers require you to pay the deductible before they will pay anything; others simply subtract your deductible from the payout.
The average cost of collision insurance is $363.08 annually, the Insurance Information Institute (III) reports. However, that amount can vary widely. Several factors influence how much collision insurance costs, including:
- Your driving record: A history of moving violations, especially for reckless driving behavior such as speeding or tailgating, could make you appear riskier to insurers, who then may increase the cost of your premiums. You may also pay more for collision insurance if you've been involved in an accident recently or you've made previous collision claims, even if you weren't at fault.
- The value of your vehicle: The amount of collision coverage you can get is limited to the current value of your vehicle. That means the more valuable the car is, the more it will cost to insure. Because cars depreciate every year, an older car generally requires less collision coverage and costs less to insure than a newer model year. In addition, some cars cost more to repair than others; if you're driving one of those models, you may pay higher collision insurance premiums.
- Your deductible: If you have a low deductible, you'll pay less out of pocket when you have a claim, but your premiums will be higher. Increasing your deductible means you're taking on more of the financial risk of driving, but it can help lower your premiums. Just make sure that you can afford to pay the deductible if you have a claim.
- Your location: Insurance regulations vary from state to state, and certain states are considered riskier than others. Drivers in crowded cities where roads are packed with cars, trucks and bicyclists are typically more likely to be involved in a crash compared with drivers who live in rural areas where traffic is more sparse.
- How much you drive: The more you drive, the greater your odds of getting in a collision. If you drive 50 miles round-trip to work and spend the weekends shuttling your kids to sports, practices and lessons, you may pay more for collision coverage than someone who only uses their car for errands once a week.
- Your personal demographics: When assessing how risky you are to insure, insurance companies look at your age, gender and marital status. They may even consider your job and whether you own or rent your home. Based on this data, they may deem you more likely to file a collision claim. For example, young and inexperienced drivers generally pay higher premiums.
- Your insurer: Premiums vary from one insurance company to another, and buying multiple insurance policies—for example, auto and home—from one insurer will often earn you a discount.
- Your credit score: Auto insurance companies in most states will use a special version of your credit score called a credit-based insurance score to better assess your insurance risk and adjust your premium accordingly. Improving your credit might help lower your costs.
Who Needs Collision Insurance?
If you lease or finance your car, the lender or lease provider will require a certain level of collision (and comprehensive) coverage to protect the vehicle. However, once you own the car outright, collision coverage is generally optional. Does that mean you can skip it?
If you're a safe driver, don't drive very often and have enough savings to easily cover the cost of a car repair, you might wonder if collision coverage is worth the cost. Dropping it to save $350 or so a year might seem like a good idea, especially if you haven't had an accident for years or have never had one at all.
But even if you can afford to spend several thousand dollars on a car repair, is that the best use of your money? Worse, your car may be irreparable after an accident, causing you to have to replace it. The average cost of a new passenger vehicle tops $32,000, according to Experian research. If your car is relatively new, spending a few hundred dollars a year on collision insurance can help you avoid bearing the full cost of replacing or repairing it.
As your car gets older, however, reducing or dropping your collision insurance can be a smart idea. You won't receive a collision coverage payout that exceeds the value of your car, after all. If your car is only worth a few thousand dollars, the potential payout may not be worth the cost of collision coverage. Instead of spending a few hundred dollars a year on collision insurance, eliminating the coverage and putting the savings into a new-car fund instead may make more sense financially.
Although it's not essential, collision insurance makes sense for most drivers as a way to avoid huge repair bills or replacement costs. Simple steps such as increasing your deductible, keeping your driving record clean and maintaining a good credit score can help to keep your collision insurance premiums low, while still providing the peace of mind you need.