Collision and Comprehensive Auto Insurance Coverage Explained

Having some level of automobile insurance is mandatory in most states. However, it can be unclear what the optimal amount of coverage is. The age of your vehicle, how often you use it, your financial position, and your risk tolerance are all variables that dictate what kind of policy you should hold.

Liability coverage is insurance that covers damage you do to another vehicle or person in an accident in which you are at fault. In states that require auto insurance, this is the mandatory type of coverage.

Comprehensive policies can vary widely and cover various risks, such as damage from hailstorms, flooding, theft or hitting an animal that’s crossing the road. Contrary to its name, however, comprehensive coverage isn’t comprehensive. It does not cover any kind of accident involving other vehicles.

Collision insurance is coverage for damage done to your car in an accident where you are at fault.

For each type of coverage, you pay a premium. Depending on the insurance provider, you might pay monthly, quarterly, or semi-annually. In addition, if you need to make a claim, you’ll pay a deductible. The deductible is the amount you must pay out of pocket before your policy will pay out for a claim. The higher the deductible, the lower the amount you’ll pay in premiums.

It’s not mandatory to carry collision and comprehensive coverage, so many drivers decide to drop one or the other to save some money. This may or may not be a good idea, depending foremost on the value of your car. For a new car that’s worth $10,000 or more, collision and comprehensive insurance are almost always a good idea. The exception is if you have enough money set aside that you’d be comfortable spending a large amount at any time to replace the car.

On the other hand, it doesn’t make a lot of sense to continue comprehensive or collision coverage on an aging vehicle. For example, suppose you have a 10-year-old car that’s only worth a couple thousand dollars. The outside is pretty roughed up and half the time you leave it unlocked because you’re sure no one would want to steal it. However, despite its age, it shows no signs of slowing down, because you’ve always taken good care of what’s under the hood. If it lasts for another seven years, you could end up paying enough in premiums to equal the value of the vehicle. Imagine all the other things you could use that money for!

Vehicle value isn’t the only factor, though. Even if a car is worth a great deal, there are circumstances where it makes sense not to keep collision coverage for the car. Suppose you have a “classic” in great condition that you’re hoping to sell. You almost never drive it, because you’d prefer to keep the mileage low and the price high. It could be years before you find the right buyer, meanwhile, you’re paying enough in premiums to buy yourself a new car for daily use. With that in mind, you’d probably want to hold on to your comprehensive policy, because an old beauty is a theft risk.

Your risk tolerance is another important factor. Maybe your car isn’t worth much, but you definitely couldn’t afford to replace it at the drop of a hat. Instead of paying enough in premiums over time to buy a new car, or dropping coverage and risking a surprise financial blow, you could compromise by raising your deductible, thus reducing your premiums.

Before you decide how to insure your ride, make sure to read the fine print of any policy you’re considering. Hopefully, you’ll end up with the right kind of insurance—and never have to use it!

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