Should I Buy Collision Insurance on an Older Car?

January 8, 2010 No Comments »


Insurance Q&A: “Should I buy collision insurance on an older car?”

Let’s face it; we’re all looking for ways to save a buck on our auto insurance premiums.

Additionally, we want to be certain we’re not paying for coverage that will wind up being useless when it comes time to file a claim.

[Compare rates from the leading car insurance companies in your area.]

That said, one of the top ways lower your car insurance premium is to drop physical damage coverage on an older vehicle.

However, there are a few things you need to consider before taking the plunge on dropping this important coverage.

First and foremost, the option may not even be available to you in certain circumstances.

Mandatory Collision Insurance

Well, the choice may not be up to you. If you don’t own your car outright, whether it’s new or old, you’re usually required by contract of the loan agreement to carry full physical damage coverage, which includes collision and comprehensive coverage until the loan is paid off. Period.

[Collision vs. comprehensive coverage]

The lienholder, or any other loss payee, will want to ensure the car loan is eventually paid off in full, which becomes difficult if the car is totaled and can’t be driven anymore. Owners tend to stop making payments in such events…

In addition, gap coverage may be necessary if you owe more money on the car than it’s worth.

While GAP coverage is never mandatory, you’d be crazy not to add this valuable coverage to your policy in the event you purchase a brand new car from a dealership.

Tip: Purchase your GAP coverage directly from your insurer rather than adding it to your dealership finance agreement. You will easily save hundreds of dollars by doing so. Your lender will charge much more for this coverage…with interest on top of that!

When the Choice Is Yours…

However, if you own your car outright, collision coverage is entirely optional. You’ll need to determine if your car is worth insuring, an answer likely based on your personal financial situation and risk appetite.

The older a car is, the less it’s generally worth (minus vintage classics). The less it’s worth, the less it costs to insure for physical damage. This alone helps the average driver maintain physical damage coverage on any vehicle, old or new.

On the other hand, if you can afford to repair or purchase a new car in the event yours is damaged, you may want to forgo the coverage and save the extra money. This only makes sense on older vehicles that have a lower actual cash value.

When Collision Coverage Is a Waste of Money

This is important…so don’t skip over this section if your car is older or not particularly valuable. There are likely tens-of-thousands of people out there paying for collision and comprehensive coverage who won’t get “squat” in the event their vehicle is damaged.

That’s right; simply paying for physical damage coverage doesn’t guarantee you’ll get your car repaired or replaced if it’s damaged.

Insurance policies dictate that your insurer is only responsible for paying to repair or replace your vehicle…WHICHEVER COSTS THEM LESS… according to its actual cash value at the time of your loss.

Here’s what it could look like when things “go wrong” for you.

Your vehicle is barely worth anything anymore. Perhaps it’s over 10 years old, or has more than 100,000 miles on it. Regardless, your car’s actual cash value may be $1,500 or less.

Let’s assume your vehicle is damaged in a collision you caused, triggering your collision coverage. Further, assume you have a $500 deductible on your collision policy and the repairs for your car are $2,000.

Guess what! Your insurer is going to “total” your vehicle at this point, based on the fact that it would cost more to repair the car than it would to replace. The insurance term for this is “functionally totaled.”

You will likely receive a $1,000 check from the insurer (your car’s actual cash value at the time of loss minus your deductible).

So even though you may have been paying a few hundred dollars annually for this coverage for a couple of years now, it turns out the insurer is not going to repair your car.

You’ll simply walk away with a small check and no vehicle, or the insurer will allow you to keep the car and pay for repairs out of your own pocket after they significantly reduce the payment to the “salvage” value of your car…which is the amount the insurer would lose out on by not “recycling” your car after totaling it and writing you a check.

In this case, opting for a liability-only car insurance policy may be the better move.  But as always, be sure to discuss this with your independent insurance agent or insurance company to ensure you fully understand all the risks involved.

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