Do I Need Collision Insurance on an Older Car?

Quick Facts About Collision Insurance on an Older Car

You can’t begin evaluating the cost-effectiveness of collision insurance on an older car without knowing its book value.
If a car’s value is less than 10 times the annual premium, you may want to consider dropping collision insurance.
Your driving record is a key variable insurance providers use when establishing your car’s annual collision premium cost.

No matter how old your car is, you need collision insurance if you hold an auto loan or lease. But what if you’re not leasing your vehicle, and your loan is paid off?

Although collision insurance isn’t mandated in any state, it can prove valuable if you are the at-fault driver in an accident. Whether it’s worth the price depends on multiple factors, including how much it would cost to fix the damage, what you can afford to pay for repairs, your car’s value, your deductible, and more that we cover below.

In this article, we’ll provide you with a few things to consider when deciding whether having collision insurance on an older car makes sense. We’ll begin with how it can protect you. We’ve provided links if you wish to skip ahead.

Why Is Collision Insurance Important?
How Much Collision Coverage Do I Need?
When Should You Drop Collision Insurance?
How Do Insurance Companies Determine a Car’s Value?
How Much Does Collision Insurance Cost?

Why Is Collision Insurance Important?

Collision insurance will help cover vehicle repair or replacement costs if you’re in an accident with another car, get hit by an uninsured driver, roll your vehicle, or collide with a fixed object like a telephone pole or mailbox. But if you’re in a crash in which you are at fault and don’t have collision coverage, you are on your own. The entire cost of fixing or replacing your ride falls on you.

Is Collision Insurance Mandatory?

No matter where you live in the U.S., collision coverage is not required by law. However, if you lease or finance your car purchase, the lender will insist you have collision coverage to protect their collateral (the vehicle).

How Much Coverage Do I Need?

When you buy collision coverage, you don’t select policy limits like you do for liability coverage. Instead, the insurance company agrees to pay for repair or replacement costs up to your car’s actual cash value at the time a covered incident occurs. The catch is that the value amount isn’t what you owe on the car but the car’s market (book) value at the time of the crash.

For example, if you get into an accident with full coverage and your car’s book value (worth) is $17,000, they’ll pay for up to $17,000 in repairs (minus your deductible) or in replacement cost. But if the car is only worth $5,000, they’ll pay for up to $5,000. What you may still owe on a loan doesn’t enter into the insurance provider’s decision-making.

PRO TIP: GAP (guaranteed asset protection) insurance is a separate insurance policy covering the difference between your car’s book value and the balance remaining on your car loan. It ensures that if your car is totaled in a covered crash, the settlement will cover any outstanding loan balance.

When Should You Drop Collision Insurance?

There are a few solid reasons to drop collision coverage on an older car, but it’s a bit complicated. Moreover, you may be surprised by some of the traditional factors that no longer figure prominently in determining a used car’s value.

According to John Espenschied, agency owner of the Insurance Brokers Group, age and mileage are no longer foolproof indicators of the need for collision insurance on an older car. “Age used to be a factor. Mileage used to be a factor. But some cars hold their value,” Espenschied said.

For example, if your car is 10 years old but is still worth $10,000, we believe it’s still probably worth paying a few hundred dollars a year for collision coverage. On the flip side, if it’s seven years old and only worth $3,000, keeping collision insurance may not make sense.

Run the Numbers

If you keep your car long enough, there will come a time when you need to ask yourself if maintaining collision coverage is worth the cost year after year. Also, keep in mind that the amount of your deductible will be subtracted from the claim settlement. In other words, if you need to file a collision claim, you must pay the deductible before your insurance coverage kicks in. When the cost of the premium plus your deductible is close to the value of your car, it might not be worth having anymore.

Doing the math of the cost of the annual collision premium over the years and the impact of your deductible on any potential claim settlement from your insurance provider may prove that paying for collision insurance is basically a waste of money. For example, let’s say your collision coverage on a car with a book value of $2,000 costs $400 per year based on a $1,000 deductible. If you need to file a claim, you will pay the first $1,000 (the deductible) out of pocket; therefore, no matter the repair or replacement cost, the maximum amount your insurance provider would cover is another $1,000. Subtracting the cost of your insurance premium for just that year further reduces the net value of that $1,000 maximum settlement to $600. In essence, you paid $400 to net $600 ($2,000 minus $1,000 minus $400 = $600). Next year, when your car is worth even less, you will shell out another $400. You must then ask yourself, when does that stop making sense?

A good rule of thumb suggested by the experts at the Insurance Information Institute (III) is that if your car is worth less than 10 times the premium, purchasing coverage may not be cost-effective.

For example, let’s say that instead of $2,000, the value of your vehicle is $7,500. In that case, the insurance company will pay up to $6,500 ($7,500 value – $1,000 deductible) for repairs. Even deducting the cost of that year’s premium from the settlement amount still makes sense to keep the collision protection in place.

How Do Insurance Companies Determine a Car’s Value?

If your car is totaled in an accident and you have collision coverage, the insurance company will reimburse you for the actual cash value of the vehicle immediately before the accident. To determine the car’s value, insurers look at multiple factors, including the make, model, age, mileage, options, and wear and tear. There is some subjectivity involved in this process. However, Kelley Blue Book monitors used car prices from around the country. With this mountain of transaction data, it can provide a fairly accurate snapshot of a used vehicle’s worth at any given time.

Espenschied told us that most settlements go smoothly, but if you’re unhappy with the insurance company’s offer, negotiate. “You want to make sure you scrutinize the value based on the features or options you have on that car, he said, and look at retail prices locally.”

If you can’t buy a similar car in similar condition for what the insurance company is offering, let them know. Explain what similar cars are selling for in your area. To find out your car’s fair market value range, check our Kelley Blue Book value tool that lets you enter your car’s year, make, and model.

The point of negotiating isn’t to get a Lamborghini to replace your Ford; it’s to make you whole again. If you’re unable to reach an agreement, let the insurance company know you want a third-party appraisal.

“Most personal auto policies have an appraisal clause that says the insurance company is required to hire a third-party appraiser to show how they arrived at (the settlement amount),” Espenschied said.

How Much Does Collision Insurance Cost?

According to the Insurance Information Institute, estimating an average cost for collision coverage is virtually impossible. Insurance providers determine premiums on a case-by-case basis because there are so many variables, including:

Book value of your car
Repair and replacement costs
Availability of replacement parts
Your age
Your driving record
Your credit score

Yes, you read that last one correctly: Your credit score can have a major impact on your car insurance premiums.

“Credit goes to the responsibility of the individual. They’ve proven that [a lower credit score] is one of the factors of inattentive driving, ” Mr. Espenschied explained. “If you feel that your rates are on the high side, I would recommend shopping around at least every couple of years. Don’t feel obligated to stay with a particular company. All carrier rates go up and down [over time],”

If you’re considering car insurance, compare policies to find the right fit for your needs.

Compare premium costs with Root Insurance.

How to Get a Lower Car Insurance Rate

There are certain factors contributing to your insurance cost that you have no control over. For example, your age and the car’s book value are factors affecting your insurance premiums over which you have no sway. However, there are several variables that you do have some power over.

Increase the Deductible: Insurance companies have in-house minimums and maximums where deductibles are concerned. So, you may be limited by how much influence on your premium cost you can achieve by raising your deductible. However, the higher your deductible, the lower your premium. Think of the deductible as the skin you have in the game when deciding whether or not to submit a claim. You see, the higher the deductible an insurer reasons, the less inclined you will be to submit smaller claims. In other words, you probably won’t be inclined to submit a $1,200 fender-bender claim if your deductible is $1,000. Moreover, if your deductible is $2,000, you won’t even consider filing a claim. What would be the point?
Clean Up Your Credit: Through past experience, insurance providers know that borrowers who are always struggling to meet their monthly obligations are more prone to submit every little claim that comes along. Those strapped for money are always on the lookout to add some cash flow. Insurance claim settlements provide extra cash. Moreover, those unable to keep up with their other payment obligations will probably struggle to pay their car insurance, too. Consequently, insurers look more favorably on drivers with solid credit scores and relatively unblemished credit histories.
Attend a Defensive Driving Course: Your insurance provider may reward policyholders who have completed a defensive driving course. It’s worth investigating.
Bundle Policies: Bundling different types of insurance with the same insurance provider can often qualify you for a reduced combined rate. For example, if you have your homeowner insurance with one provider and your car insurance with another, check out any cost advantages for bringing them together under one provider.
Shop Around: Nothing stays the same, right? You get older, your credit score changes, insurance companies adjust their rates, and all manner of other changes can impact an insurance premium. At least once a year, shop around. Get a minimum of three quotes and compare them. Furthermore, any time you experience a life change like marriage or relocating should trigger a reevaluation of your insurance.

Editor’s Note: This article has been updated for accuracy since it was originally published. Jennifer Brozic contributed to this report.