When you’re looking for ways to save money, lowering your monthly car insurance premium may be one of the first places you look. But, is it wise to drop your collision insurance coverage? How do you know when it’s a smart financial decision to do so?
First, remember that collision coverage protects your vehicle investment if you have an accident with another car or object, such as a guardrail or light pole. It also pays if you have a single-car accident, like a rollover.
It may make sense to drop this coverage, but the first thing to determine is whether you are allowed to drop this optional coverage. If you do not own your car outright, for example you have a loan or lease on the vehicle, you are most likely required to carry collision.
But, if you’ve paid off your car and own it, here are some thoughts about collision coverage and when you might want to consider dropping it.
The Pros of Dropping Collision Insurance Coverage
It’s pretty easy to make the case that being able to drop collision coverage will result in savings. In some cases, you may be able to cut your premium in half. The money you save in premiums could go straight into a savings account to either save up for a new car. Or if you do get into an accident, the money can be used to repair your car, since the insurance company will no longer be chipping in.
But, before you get too excited about saving some money let’s take a look at the flip side.
The Cons of Dropping Collision Insurance Coverage
Simply put, if you drop collision coverage, you will have to pay out-of-pocket if you hit something. Being unprotected by collision coverage may mean losing your car if it is totaled and you don’t have the money to replace it.
This might be an important reason to keep collision coverage, because if you drop it, the only way you will get money to fix or replace your car is if the accident is caused by someone else and they have auto insurance.
The Rule of Tens
The Rule of Tens is a common way to determine whether you should keep or drop collision insurance.
Essentially, it goes like this:
- Ten Percent – Figure out the book value of your car and add your collision deductible to it. Then take ten percent of that. If you are paying more than ten percent of the value of your car plus the deductible, you may want to consider dropping collision coverage, as long as you feel you can repair or replace your car if damaged or totaled.
- Ten Years – If your car is more than 10 years old, you should take a look at the numbers. The vehicle’s value probably fails the ten percent of value plus deductible rule above.
- Ten Times – If you don’t meet the ten percent or ten years rules, you may still save by dropping collision coverage if you have ten times your collision premium in savings to repair or replace your car.
If you want the real numbers, use the fast and easy InsuranceWins form to find out how much you might save by dropping collision coverage.