If only taking out car insurance was a straightforward and cheap process. Instead, you have to weigh the pros and cons of adding various optional coverages to your basic car insurance policy. Are the costly annual premiums you have to pay for a specific type of coverage going to be worth your while in the end?
The best you can do is to inform yourself regarding the various optional insurance coverages before you make any decisions. At times, however, you may be forced to take out certain types of insurance. While collision insurance, for instance, is not required by state law, some lenders may want you to have this coverage. If you’re unsure whether you need collision insurance, read on.
Which Type of Car Insurance Is Compulsory?
Not all types of car insurance are optional. Motorists in all states in the U.S. are required to have a minimum insurance coverage, which is called liability insurance. The amount of required liability insurance varies from state to state.
Liability insurance provides protection for another party/parties if you’re ever in a situation where you’ve caused an accident. Since liability insurance only covers damages or injuries suffered by a third party, and not your own, it’s also referred to as third-party insurance. This type of insurance includes two separate coverages. These are:
- Bodily injury: This insurance provides coverage for medical costs when a third party or third parties are injured. Depending on the coverage, the third party may also be paid out for loss of income and/or legal fees.
- Property damage: This insurance helps to cover the costs of repairing damages to the third party’s vehicle. It also covers damages to other types of property, such as fences, poles, or buildings.
What Is Collision Insurance?
As you may have noticed, liability insurance does not cover damages to your own vehicle. In the event that you collide with another vehicle or drive into a fence, pole, or structure, you will need collision insurance coverage to pay for damages to your own car. As mentioned before, this type of insurance is not required by state law. However, it can be a lifesaver in the event that you’re in an accident that causes serious and expensive damage to your vehicle.
Collision insurance typically covers accidents in which your vehicle is moving. Apart from providing coverage when you collide with another vehicle or object, collision insurance will also pay out in the event that you roll your car or drive over a pothole.
You can file a claim from collision insurance whether the accident is your fault or not. The limit of this type of coverage is typically the actual cash value of your car. This means that if, for instance, your vehicle is totaled in a crash, collision insurance will pay out the current value of your vehicle. The only amount you’ll need to pay is the deductible.
What Does Collision Insurance Not Cover?
Collision insurance, however, does not cover all damage to your vehicle. For instance, if the damage to your car is caused by a natural disaster, such as a flood or a fire, this type of collision will not pay out. Also, if the damages occur while the car is parked, you are also not covered by collision insurance. In addition, if your vehicle is vandalized or stolen, you will also not be able to claim from collision insurance.
When damages happen due to the events mentioned above, you will need comprehensive insurance in order to claim. Comprehensive insurance will pay out for the following:
- Accidents involving animals
- A branch of a tree falling on your vehicle
- Damages due to hail, floods, or fire
- Theft or vandalism
As is the case with collision insurance, comprehensive insurance typically covers the actual value of your car at the time of the accident. In the event that you claim from your comprehensive insurance, you will also need to pay a deductible.
Do You Need Collision Insurance?
Before you can make an informed decision about whether to opt for collision insurance, you need to consider the cost. How much you’ll pay for this type of coverage will depend on multiple factors, such as your marital status, gender, age, and driving record. If you lease your vehicle or have a loan on it, the lender may require you to have collision insurance to protect its investment in your car.
According to MarketWatch, the average cost of collision insurance in the U.S. is around $363. Variables such as those mentioned above, however, will determine your premium. And so will your state. While the average cost of collision insurance in a state such as South Dakota amounts to $236, you can expect to pay around $498 for the same coverage in Washington, D.C.
If you can afford collision insurance coverage, it may be a good idea to go for it. Having to pay for expensive collision damages to your car, or having to buy a new vehicle if your vehicle is totaled, is obviously best avoided.
When Not To Take Out Collision Insurance
Although taking out collision insurance is often a good idea, there are also times when you may want to forgo this coverage. If, for instance, you have the money available in your savings to buy a new vehicle in the event that yours is totaled, you theoretically don’t need collision insurance.
In the best-case scenario, you may never be involved in an accident and will end up saving hundreds of dollars annually. In the worst-case scenario, you may total your vehicle and will have to buy a new one out of your own pocket. If so, you can at least placate yourself with the knowledge that you’ve saved all those annual collision premiums. Plus, you possibly would have had to pay a high deductible.
Forgoing collision insurance is especially valid if you own an old vehicle with a very low actual cash value. In such an instance, paying for collision insurance will not be worth it and you’ll be better off saving your money.
In the end, the choice of whether to take out collision insurance or not will depend on your unique circumstances. Before you make a decision, factor in all the variables, such as your car’s age, your driving record, and your budget.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.