Should I drop collision coverage from my auto insurance?

Written by Ryan Lowell on March 22, 2011 & Posted in Insurance

Don't drop the ball when dropping collision coverage.

Dear Ryan,

I am trying to save money on my car insurance, and my friends tell me to drop collision coverage since my car is "just about worthless." Granted, it isn't new anymore, but it is a far cry from worthless. How do you determine when it is time to drop collision coverage to save money?

Thomas R. Orlando, Florida

Hello Thomas,

The basic rule of thumb is if the actual cash value of your car, minus your deductible, is less than twelve times the annual cost of your collision coverage you should drop your coverage to save money. I have seen this rule stated as low as seven times your coverage, but twelve seems to be the most common number. Another common guideline is if the premium for the coverage is 10 percent or more of the car's value, you should drop the coverage.

On my vehicle, the collision coverage cost me $251 annually and I have a $500 deductible. Using the 12-times the cost of my coverage rule, I would theoretically drop my coverage if my vehicle was worth less than $2512 ($3012 - 500). Using the 10 percent guideline, I would drop the coverage at $2010 ($2510 - 500).

If I were not able to absorb a $2500 loss, I would not drop my coverage until the value of my car, less my deductible, was low enough that I could financially recover from the loss.

You also have to consider the probability of a claim. Collision coverage pays for damage to your auto when you are at fault. If you are a safe driver and don't feel you are at risk for a claim, you may want to drop your collision coverage sooner. If you have been averaging a collision claim every couple of years, you may want to hang on to your coverage a little longer because a policy without collision coverage might not be the cheapest insurance.

Ultimately, Thomas, only you can decide when it is the right time to drop your collision coverage to save money on auto insurance. Use the guidelines, but factor your financial situation and the probability of you filing a claim into your decision.

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