When do I drop collision insurance on my car?

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Here's what you need to know...

  • Collision is an optional coverage that’s available on standard Personal Auto Policies
  • Collision coverage pays for the repair or replacement of a covered auto
  • State law doesn’t require vehicle owners to carry collision coverage, but if a vehicle is financed, the lending contract states that the borrower must maintain full coverage on the car until the loan is paid off
  • When there’s no longer a loan on a vehicle, you’re free to remove both comprehensive and collision coverage without being penalized
  • Some consumers who own their vehicles outright will keep collision on their policy while the car holds value
  • It’s important to assess the cost of collision coverage and compare the cost to your car’s value. If you’ll receive a very small sum of money when filing a claim, it might make more sense to remove collision
  • Insurance companies use valuation guides and average sales reports to determine the Actual Cash Value of a vehicle

Consumers nationwide spend an average of $841.23 per year on auto insurance premiums. Surprisingly enough, almost $300 of the average expenditures go towards collision coverage. This means that an average of 35% of insurance expenditures are spent on collision protection. The remainder goes towards bodily injury liability, property damage liability and comprehensive coverage. Compare car insurance rates now by using our FREE tool above!

Since collision makes up more than one-third of your premiums, it’s important not to carry the coverage for longer than you need to. There are times where you’re expected to carry physical damage coverage on your car and there are other times where it’s entirely your choice.

Dropping coverage can save you money, but doing it prematurely can cost you. Here’s your guide so that you can save money without putting yourself in a financial bind:

What is collision coverage?

Collision coverage will pay for damage to your covered auto if it’s damaged in a crash with another vehicle or any other type of real property. Collision also pays up to the Actual Cash Value of your vehicle for damages sustained if your vehicle flips over.

What is a collision deductible?

When filing a collision claim, you’ll be required to pay your deductible. The deductible is the portion of a loss that you must pay before the insurer will offer coverage. The higher the deductible, the more risk you take.

By bearing more risk and reducing your likelihood of filing a claim with a high deductible, you’re offered lower premiums.

The deductibles that are offered by insurers generally range between $200 and $2000. In an at-fault loss, you’re required to cover your deductible when you file a claim. You also may have to pay your deductible when you’re not to blame for a loss and the other party flees the scene. This is why it’s important to select a deductible that you can afford to pay.

Does the state require you to carry collision?

Each and every state has different rules concerning how much auto insurance residents must carry when they own a car. Even though the state-to-state car insurance laws vary, not a single state requires drivers to carry physical damage coverage that pays for damages to their own cars. This is an optional coverage that consumers can add by choice.

The state is more concerned with drivers being able to pay for the damages that they’re liable for and not damages to their own property. Liability insurance pays for the damages that you cause and not the damages that you suffer. Because of this, a majority of states require the following coverage options:

  • Bodily Injury Liability
  • Property Damage Liability
  • Uninsured Motorist Protection (required in some states)
  • Medical Payments (required in some states)

When is collision coverage required?

The state might not care if you have collision coverage, but your lender definitely will. If you currently have a loan or you’re leasing your vehicle, you’re obligated under a contract to carry physical damage coverage on the collateral. So, if you have an active loan on your car with a balance, you can’t remove collision until the loan is paid off.

What happens if you remove collision on a vehicle that’s financed?

If you take the risk and remove collision before your loan balance is paid off, you could pay some serious penalties. The biggest drawback is that there’s a chance you could have an uncovered loss on a car that you don’t yet legally own.

You’ll be left paying loan payments for a car you have to repair and might not be able to drive.

Another penalty to consider is forced-placed lender insurance. Lenders are notified when collision is removed and will immediately add the cost for special force-placed insurance on your loan. This coverage only protects the lender and can extend the amount of time it takes to pay off your loan. It increases the amount of interest you’ll pay over the life of the loan.

Should you keep collision when your car is paid off?

When you submit your final payment to pay off your car you’re free to remove full coverage, but that doesn’t mean you should. Whether or not you should drop the coverage depends on the vehicle’s value and how much you’re paying for your physical damage premiums. If you can’t afford to replace your car on your own without the insurance, it’s best to keep it.

Is there a rule of thumb that helps you decide?

If you’re driving an older car, it might be hard to separate sentimental value from monetary value. Mixing up the two could cost you more in insurance premiums than your car’s worth. One good rule of thumb is to drop collision when the value of the car is worth less than 10 times the premiums you’re paying for physical damage every year.

How is a vehicle valued by an insurer?

Insurance companies won’t pay the full cost to replace a vehicle but they will pay up to a vehicle’s fair market value for repairs or replacement. Because of this, your car might be worth less than you initially think.

Depreciation is factored in and companies will use sales records and other data to see how much the car might go for in a city or county.

You shouldn’t rush to remove collision just because it will save you money. It’s best to look at the car’s current value and the current cost for collision first. If you feel like you’re paying too much with your insurer, compare premiums for full coverage and basic coverage with other carriers.

You can easily compare premiums in a single sitting by using an advanced online rate comparison tool. The tool will show you how much you’ll pay for full coverage with dozens of companies. Enter your zip code in our FREE tool below to compare car insurance rates now!

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