To answer this question, we first need to provide a little background on exactly what collision insurance coverage is. Collision coverage is basically a promise to pay a specific dollar amount for your vehicle, minus the deductible, should your vehicle become damaged in an accident.
There is a maximum to the amount of reimbursement based on the official book value of your insured vehicle. As your vehicle declines in value each year, so too does the amount of money the insurance company will pay for that vehicle in the event of an auto accident. Also, collision insurance only pays if the accident is your fault. If the accident that damages your vehicle is the fault of another driver, their insurance would cover the cost.
There comes a point when the annual cost of collision insurance is greater than the replacement value of the insured vehicle leading to the question, When should I drop collision coverage on my car? There is no set in stone answer to this question but there is an educated formula to help you make that decision.
If your cars value is under 5 times the additional cost of annual collision coverage then you may very well be at a point where the collision coverage can be dropped, assuming you have the cash on hand to replace that vehicle should it be destroyed beyond repair without the coverage. Auto values between 5 and 10 times the annual coverage cost can be considered on an individual basis. The cash on hand to replace this vehicle is frequently a little more than most people have for such a purpose. If your cars value is more than 10 times the additional cost of annual collision coverage, you probably need to keep the insurance. Also, very expensive vehicles can skew this formula.
Another formula is called the Rule of 10. When collision coverage costs more than 10% of the book value of your vehicle plus your collision deductible, you may consider removing collision. If your vehicle is more than 10 years old, it may no longer have enough value to require collision insurance. Finally, if you have 10 times your annual collision premium in an emergency fund, you probably have enough capital to put a sizable down payment on a replacement vehicle or replace the vehicle with a low cost alternative.
There are some who believe the real question is, what would it cost to replace the vehicle in the event it is un-repairable? If your collision insurance pays off your car due to an accident, would you be more likely to replace it with a used car for an amount less that the replacement value of the current insured vehicle or would you want to buy a new vehicle requiring a down payment?
Realistically, most people tend not to downgrade their ride after an accident which brings us to another point. Some vehicles are cheaper to rebuild than to replace. Your vehicle may look like a twisted pile of metal after an accident but if the replacement value far exceeds the cost to make it look new again, you will be getting that vehicle back, hopefully looking as good as new.
Of course there is one smart and safe way to get the answer to this question. Pick up the phone and give us a call or better yet, stop in and visit us at our office. A review of your current auto insurance policy and our years of experience in Nashville will ensure you get the absolute best rate on all of your insurance needs and the highest level of service. Dont let your important insurance questions go unanswered. Contact us today!