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Dropping Auto Insurance Collision Coverage

It is not easy for drivers to decide when it is the right time to drop auto insurance collision coverage. In fact, many drivers probably hold on to collision insurance for too long, after its value has been outstripped by its cost. Collision insurance is an important component of your overall policy, and it certainly has great value in a lot of circumstances. However, there comes a time when its value just isn't what it used to be. Understanding the real purpose for auto insurance collision protection, including what it covers and does not cover, can help you decide what to do when you car's value declines and you feel it might be time to consider dropping it from your plan.

The Purpose of Collision Insurance

As a general rule, collision insurance is most useful for protecting cars that are worth the most money. That's because the purpose of collision is to protect the insured vehicle against the risk of damage or loss of use due to an accident. Collision does not include any protection for the driver against the cost of damage to the other vehicle-this is the domain of auto liability insurance. It is good to note that liability insurance is the cornerstone of any policy, because it is required virtually everywhere. Liability insurance takes care of your obligations to the other driver when you have an at-fault accident.

But collision insurance is different. It is only concerned with protecting the covered car, and not the driver. It makes no distinction for liability in an accident situation, only concerning itself with the cost of repair versus the limit of coverage in relation to the vehicle's value. Collision insurance pays the insured policy holder for the monetary amount of damage sustained by the vehicle in an accident, minus deductible.

The purpose of collision insurance is to essentially provide you with a way to protect the financial investment you have in a car. It can also do the same for other interested parties. If you owe money on a vehicle or if you lease, chances are your lien holder will require collision insurance as a way to protect their investment in the vehicle. But buying this coverage protects you just as much, because if you have to walk away from a car you have halfway paid off with no compensation whatsoever would be a devastating shock for most of us economically.

The limits of your collision policy will be based on the auto insurance company's assessment of the value of the vehicle. If you get into an accident and your car is totaled, for example, you will receive a check for that assessed value minus the amount of your deductible. At times like this it is important to be aware of what you feel your vehicle is worth. You might find that the provider is not giving you as much money as you feel you have coming. If this is the case, you should still be able to receive a check for the amount the provider has offered while you work to resolve the dispute over the additional amount.

When a Car's Value Declines

That monetary value is at the heart of the issue of whether and when to drop collision insurance on your vehicle. Since it is based on the value of the insured car, its usefulness clearly declines as time wears on. Obviously, you need to carry collision while you are in the process of paying back an auto loan, or if you are leasing. But once you own a car outright, it is time to at least start thinking about dropping collision.

As many of us are already aware, the value of your car goes down as soon as you take possession of it. Even while you are driving it home from the showroom, your car is already worth less than what you agreed to pay for it. For this reason, car buyers who cannot put a large down payment on a vehicle are often upside down for several years. Being upside down simply means you have negative equity in a vehicle: that is, the amount you owe on it is more than what it is really worth. When you are upside down, collision insurance is essential, and you may even consider adding gap insurance to protect you further until you get the balance paid down.

But in situations where you own the car outright, you should frequently evaluate your insurance situation to determine if the money you are spending can be readily justified. Collision insurance declines in value as the car declines in value, but the price of this insurance form often does not decline as quickly. Paying for collision on a car you paid $20,000 for might still cost almost the original amount even when the car's value is down to $10,000, and so on.

Knowing When to Drop Collision

There is no crystal clear method or litmus test to determine when you should drop collision coverage. Every situation is different, so you need to think about yours in terms of the individual variables of you as a driver and car owner, and the car itself. If the car is more than four or five years old, you should at least look into dropping collision. Many experts give a general rule of thumb related to cost of insurance versus the value of the vehicle. For them, it is impractical to carry collision insurance if the cost of such insurance exceeds 10 percent of the value of the car.

Again, it must be pointed out that the insurance company's assessment of your car's value and your own may be two different things. Still, for your purposes you can usually rely on the Kelley Blue Book value of a car or some similar instrument to use in applying this formula. Also, it cannot be overstated the importance of personalizing the data you come up with. For example, look at the numbers in light of whether you could afford to make needed repairs or replace the car without collision insurance.

Many of us have little or no extra savings, living paycheck to paycheck. The same reasons we end up upside down in our new car purchases may also compel us to hang on to collision insurance a little longer than we might like, simply out of necessity or the dearth of resources needed to come up with a suitable replacement if we experienced a total loss with no collision protection. In any case, it is good to review your auto insurance situation every six months to make sure you are carrying the right and appropriate types and levels of insurance protection given your needs and your specific circumstances.

Auto insurance collision protection is a very important and certainly a useful mode of car insurance coverage. Given the right set of circumstances, it is also a wise investment protecting your financial interest in an automobile. However, those circumstances change over time, and you need to keep up with them as your car ages and declines in value to be sure you are not wasting auto insurance premium dollars that could be better used elsewhere.

 

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