Should you drop collision coverage?

thIf you’re thinking about ditching collision, don’t do it based on some imagined formula. Although most people drop it by the eighth year of ownership, there’s no hard-and-fast (fast and furious?) rule.

Or so I found out while researching “When to drop collision coverage – and risk it all” for Insurance.com.

You’re required to have collision until your auto loan is paid in full. It repairs or replaces your wheels when you’re hit by an uninsured driver or when you have an at-fault accident. (Damn you, black ice!)

Insurance.com analyzed data from half a million car insurance quotes and found that year eight is when the biggest number of owners bid adieu to collision. Some swear by “the 10 percent rule”: If the annual premium is 10 percent or more of the car’s value, better to bank those bucks against a replacement vehicle.

But it’s not always that simple. Collision coverage is another example of how those living on the margins pay more.

Suppose you slam into a guardrail during an ice storm and your car wasn’t worth fixing. If your heap is worth $1,500 on paper you might get $1,000 after the deductible. That’s not much, but it’ll get you headed toward a replacement. Drop collision, though, and you’ll you’ll get squat.

Covering your butt = opportunity cost

Here’s the frustrating part for the paycheck-to-paycheck set: Keeping the coverage could mean you’ll pay out more than a grand during the years you own the car.

But if you don’t have enough money saved to replace it immediately, you don’t dare stop paying for coverage. (Hint: If you can’t get to work, you don’t get paid.) Yet another example of the opportunity cost of the paycheck-to-paycheck lifestyle.

Speaking of cars: “Should you spy on teen drivers?” is one of my recent pieces on Money Talks News. The motor vehicle crash is the leading cause of death for U.S. teens. Thus some parents feel justified in using technology to monitor their kids’ driving habits.

This can be as simple as installing a find-my-phone app, so you can check on Junior’s physical whereabouts. But you can also shut down incoming calls/texts, set a speed limit and even keep the sound system to a certain level (useful when you’re not along to say, “Turn that crap down!”).

Nothing like that was available when I was young. If it had been, I would have been insulted as only a teenager can be: “Don’t you trust me?” But it’s got nothing to do with trust, kids.

It’s just human nature: When you’ve got a car full of your buddies daring you to pass that slowpoke in front of you, or when a text comes in that you think you simply must read – just this once! – then you’re likely to forget everything your parents told you about safe driving. (Assuming you were even listening.)

Life hacks, holiday shopping and free retirement advice

Also up at Money Talks News:

Tons of simple hacks for stuff you do every day” – This includes some really cool tips like Downy dunks, getting the water-mark line off a pool and keeping extension cords from making a break for it. Plus: You’ve probably been using aluminum foil the wrong way.

Thinking about holiday shopping? Do a financial reality check first”: If you’re still paying off last year’s Christmas presents, perhaps it’s time to rethink your strategy. The piece talks about ways around breaking the bank and includes a link to a National Foundation for Credit Counseling article that explains the ways that holiday excess can put your overall finances at risk in both the short and long term.

If you’re looking for information on financing your post-working life, don’t miss “Jump-Start Your Retirement Plan Day,” an online chat sponsored by Kiplinger’s Personal Finance and the National Association of Personal Financial Advisors.

Free (and personalized!) advice will be offered by 20 financial advisors on topics such as retirement plans, paying down debt, taxes, income in retirement and helping your kids with college. You can submit a question in advance or during the chat, which takes place from 9 a.m. to 5 p.m. Eastern on Thursday, Sept. 25.

Follow the chat at live.kiplinger.com, or use the #JumpStart hashtag on Twitter. Can’t make it that day? Read the questions and answers afterward. Future You may be very glad you did.

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  1. Carolina Cooper

    I am one of those who has a vehicle over 8 years old and keeps the collision insurance. My ride is a 2005 Jeep Liberty with only 71,000 miles on it. Since I am retired, if it were totaled, I would be hard pressed to have a down payment for a new vehicle. The insurance payment is $68 a month, and includes my homeowners policy, too. Thanks for your always informative articles. I think what you wrote supports my sense that I am making the right decision to keep my coverage as is.

    • Donna Freedman

      One of the guys I interviewed in the article has collision coverage on a 16-year-old vehicle — but it’s a Lexus, which has held its value pretty well. Another person has a pair of 12-year-old cars, both of them covered because they’re still worth between $6,000 and $7,000.
      Every situation is different. Do what works for you.
      Thanks for reading, and for leaving a comment.

  2. “another example of how those living on the margins pay more.”

    That. It takes so much determination and effort to escape the paycheck-to-paycheck cycle, and there are many systems in place to ensure that it stays hard.

    We have never had collision insurance on Mr. Vega’s 1991 CR-X. Although for the first year he had it, we would have not been able to afford another $4,000 car if something had happened to it, so we were very lucky. We do maintain full coverage on the 2012 subcompact we paid cash for, though, as we wouldn’t want to deplete our savings to replace it.

    It’s true that there is no one answer that’s right for everyone… thank you for pointing that out!

  3. Paid off 11 y/o Toyota Corolla with 200,000+ miles = no collision. BUT once it was paid off, began to bank that “car payment”. Should be able to pay cash or close to it for new wheels when the time comes.

  4. mrs. short

    What timing! I just emailed my agent this week to ask what our savings would be if we were to drop collision on hubby’s 2002 Honda Civic. According to kbb, it’s worth about $3200. We’re not looking to get rid of it anytime soon – he wants to run it into the ground. (We consider it a challenge!) Turns out, it would only save us $87/yr. For $7.25/mo, we’ll keep the coverage!

  5. Fascinating! I’d never thought of this — I’ve always just held collision coverage. My car is over 10 years old now and worth just under $4k. I’m wondering if I should drop the collision, so I’ll have to run the math.

    One thing you didn’t touch on: should my considerations change if I have a new car fund? We don’t earmark, per se, into funds, but my husband and I have more than enough in our E-fund for a new car right now. Does that swing our math more in the direction of dropping collision? Time to sit down with the calculator and think of options.

    • Oh, I thought of one more consideration. We rent a car usually once a year or so on vacation. We use our car insurance rather than buy from the car company. I imagine that also influences our math, as keeping collision is likely cheaper than paying for insurance for a week or two of rental, as we live in a small midwestern town. Hmmm. So many options.

  6. We drive our cars into the ground. I’ve always commuted at least 20 miles each way to work 🙁 and so to us, it makes sense to keep collision coverage. I was glad for the collision coverage and substitute transportation after my 2001 Volvo was rear-ended on Rt. 93 outside of Boston about 6 months ago.

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