Is Collision Insurance Worth It?

You'll need to make many decisions when you get car insurance, one of which is whether to get collision insurance. It's generally required if you're leasing your car or paying it off, but once that's done, you'll need to decide whether to keep it or drop the coverage.

Collision insurance coverage typically helps fix the damage to your vehicle if you’re involved in a car accident, but it's not always worth it. If your car isn't worth very much relative to the amount you're paying for the coverage, it may be cheaper just to drop it entirely.

Learn more about how collision insurance works and whether it’s worth it for you.

What is collision insurance?

Collision insurance is a type of car insurance that helps to cover the costs of fixing your car after an accident, whether you were responsible for it or not. It covers damage caused by hitting another vehicle or even a stationary object, such as running into a tree or a lightpost.

It’s typically purchased in addition to liability insurance, which covers property damage and medical bills for other parties if you are found to be at fault in an accident.

Oddly enough, collision insurance does not cover damage caused by hitting a deer or other wildlife. That's covered by comprehensive insurance, a different type of coverage that covers events such as theft, vandalism, fire, weather, and accidents with animals.

If you're leasing your car or paying off a car loan for it, you probably won't have much choice in the matter of whether to pay for collision coverage. Most lenders will require you to buy collision and comprehensive coverage in addition to liability coverage because they still have an ownership stake in your car.

Once you pay it off and own the car free and clear, you can choose whether to keep collision insurance.

How collision insurance works

As with most types of insurance, collision insurance typically comes with its own deductible. This is the amount you have to pay before your coverage starts. After that, your insurer will cover any additional damage up to your car's actual cash value and the limits of your policy.

For example, if you have a $500 deductible and you spend $2,000 getting your car repaired after someone rear-ends you on an icy road, your insurer will reimburse you for $1,500. If you’re not at fault, your insurer may cover the damage without you paying the deductible. Or if you paid the deductible, it may send you a check.

How much is collision insurance?

Collision insurance costs an average of $290 per year, according to the Insurance Information Institute. It's typically available as an a la carte option with the car insurance you're required to carry in each state.

The actual cost of collision coverage depends on many factors:

• Where you live
• How old you are
• Your credit score
• Your driving record
• Your car's age, make, and model
• How large of a deductible you choose

For example, collision insurance may cost less for an older car than it does for a new car. In addition, insurance policy premiums vary a lot between insurers. That's why it's always a good idea to shop around for the best car insurance rates each time your current policy comes up for renewal, as you could be saving a bunch of money if another insurer offers better rates.

Is collision insurance worth it?

The truth is that collision insurance isn't always worth the cost. You may have heard that it's not worth carrying for older vehicles, and that can be true, but not always. Instead, it boils down to the math, the value of your vehicle, and your personal comfort level. Here's how to check for yourself whether it’s time to drop collision insurance.

Step 1: How much will collision insurance cost you?

We'll start with a cost-benefit analysis. To figure out how much it'll cost you, you'll need to add two numbers together: your annual premium and your deductible.

For example, if your annual premium for collision coverage is $290 per year and your collision deductible is $1,000, then your insurance costs, should you ever need to file a claim, would be $1,290.

Step 2: How much will you get from filing a collision insurance claim?

Next, we'll calculate your potential benefits. For this, you'll need to subtract your deductible amount from your car's current actual cash value.

This is not what you paid for your car necessarily; it's how much your car is currently worth today if you were to sell it. It's a good idea to check the value of your car from a couple of resources to get a good idea of its value, such as Kelley Blue Book and Edmunds.

For example, if your car's actual cash value is $5,000 and your collision deductible is $1,000, then the maximum payout you'd receive in a worst-case accident scenario, such as a total loss, would be about $4,000. This is the "benefit" part of the cost-benefit analysis.

Step 3: Compare the cost of insurance to the potential benefit

To see if the math works out, compare the insurance cost you calculated in step one with the insurance benefit you calculated in step two:

• If the cost is more than the benefit: Collision insurance isn't worth it. You'll pay more for the insurance than you'd get if you needed to file a claim.
• If the cost is less than the benefit: Collision insurance may be worth it. In a worst-case scenario, you'll receive a bigger cash payout than you paid into the system.

Continuing our example, you'd pay $1,290 for collision insurance and if you needed to file the maximum allowable claim for car repairs, you'd get $4,000 back. In this case, it's probably worth carrying the insurance because you'll potentially get more back than you pay in.

Step 4: Consider your comfort level and savings account

It's good to know the numbers behind big financial decisions, but it's also important to consider how much savings you have and even how you feel too.

For example, if your collision insurance costs would be $2,000 and your maximum benefit would be $2,100, then you're only really potentially saving yourself $100. And even then, that's only if you were to file for the maximum possible claim.

In that case, is it really worth paying $2,000 for collision insurance on the off chance you might save $100? What about $500? $1,000? $5,000? The answer depends on your personal comfort level and how much you have in your emergency fund to pay for auto repairs that aren't covered by insurance.

How to save on collision insurance

There are several things you can do to lower your collision insurance premiums. Here are a few ideas:

• Drive safely. The more dings you have on your driving record, the more your insurance will cost. Drive safely, and you'll be rewarded in more ways than one.
• Shop around. Different auto insurance companies charge different rates for each type of car insurance. Get rate quotes from as many companies as you can, or find an insurance broker to do the shopping for you.
• Scout for discounts. Most auto insurance providers offer lots of discounts that could save you money. Be sure to ask about these discounts when you get a car insurance quote.
• Boost your deductible. The higher your deductible, the lower your premium — but remember, this still affects your total insurance costs if you need to file a claim. Most financial experts recommend choosing the highest deductible you can afford to pay out of pocket.
• Work on your credit score. Car insurance rates are often tied to your credit score. If you work to grow your credit score, you'll save money on insurance and other financing costs too.
• Reassess your insurance needs at every renewal. You might be paying for collision insurance today, but when you go to pay your bill next time the calculation may have changed. As with shopping for new insurers each time you renew, check to make sure your current coverage still makes sense too.

FAQs

Bottom line

Collision insurance isn't always required, but about 80% of drivers do carry it along with comprehensive insurance. If you’re concerned about the cost of repairs to your vehicle if you’re involved in an at-fault accident, it could be worth carrying. And if your car is financed, you’re required to. It all depends on the market value of your vehicle and your personal preferences.

Regardless of the type of coverage you’re looking for, be sure to get multiple car insurance policy quotes so you can find the best coverage. Our list of the best auto insurance companies is a good starting point.