Auto Insurance: Is Collision Insurance Right For You?

If you own a car, auto insurance is simply a must. A legal requirement in almost every state, you must have at least some form of auto insurance before you get behind the wheel and start driving. There are a number of different types of auto insurance, however, and not all of them may be right for you or your personal finances. For instance, how can you know if you should purchase collision insurance?

Collision insurance is not a legal requirement and may or may not make sense for your personal finances. Before making this determination, it is important to understand the ins and outs of these types of insurance policies.

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What Are the Different Types of Car Insurance?

There are several types of car insurance. Practically every U.S. state requires drivers to have liability insurance, which will help to offset any damages that you are at fault for causing. This includes damage to other cars, physical property, and the health of other individuals.

Beyond liability insurance, there are plenty of other types of coverage that you can purchase. These include policies that will help to pay for your healthcare costs, additional coverage if the counterparty is underinsured, and gap insurance to make up the difference between what the car is worth and how much your insurance will pay to have it fixed or replaced.

This includes collision insurance, which helps pay for any damage to your car that occurs in an accident.

What Is Collision Insurance?

Collision insurance will pay for damages to your vehicle if it is in a car accident. This could be when you are driving or if it is hit by another car while parked on the side of the road.

In other words, collision insurance is triggered if damage occurs to your car as a result of an accident with a moving vehicle. This could be a multi-car pile-up or a single-car accident.

Collision insurance does not cover damages from non-driving-related incidents, such as a tree falling on a parked car, vandalism, or theft. These incidents are covered by comprehensive insurance, which is why these two types of policies are often sold in tandem.

The maximum amount of this insurance is usually capped at the value of your car. In other words, collision insurance is designed to help you recoup the value that your car has lost as a result of the collision. Therefore, depending on the value of your car and the deductible, it may not make sense to hold this insurance.

When Is Collision Insurance Worthwhile?

Collision insurance will pay for damage to your car in an accident. It can be used to either repair or replace your vehicle. Therefore, whether it is worthwhile depends on the value of the car, the amount of your deductible, and the marginal cost of the collision insurance.

The maximum amount that you would receive from your insurance company is capped at the current value of your vehicle. Therefore, as your car decreases in value, it becomes less and less cost effective to own collision insurance. While everyone has their own threshold, make sure that the value of your coverage is above the total cost of your premium payments and deductible.

However, there are also instances when you may not have a choice. For instance, if you are leasing or financing your car, the institution that has financed the transaction may require you to own collision and/or gap insurance. Cars are depreciating assets, and their value decreases over time.

Therefore, the value of the car might be less than the outstanding balance that you owe. These companies have an interest in making sure that they are able to recoup their investment.

Conclusion: Making Sure You Are Covered

Though having car insurance is a requirement, there are levels to the amount of coverage that you will be able to purchase. There are a number of considerations that go into every personal finance decision. Weighing your current needs and future objectives is a constant balancing act.

While it is important to purchase sufficient insurance, not every policy available makes financial sense. For this reason, it is a good idea to understand what collision insurance covers and whether the money you are spending is worthwhile before you decide to purchase this type of car insurance.

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