Bottom Line: Unless you already have, and can maintain, a significant amount in savings, you should purchase collision coverage for your vehicle, even if it is of little value.
If you have a valuable car, you should purchase collision coverage.
Many people try to save money by declining collision coverage. For older, less valuable cars, collision coverage with a $500 deductible usually costs $200 to $300 per year. If it cost $300 per year for collision coverage on a car that has a $3,000 value, one would pay $900 over the course of three years– or about a third of the car’s value. Declining coverage seems to make sense, right?
I no longer think so.
Collision coverage helps pay for more than your car. It benefits your work, physical health, and mental health.
Allow me to explain via the following example:
Eve is in her mid-twenties and a full-time employee. She rents an apartment with a friend. Her share of the rent is $450 per month. Eve drives 30 minutes to and from work in her 1998 Honda Civic. The car has put on over 100,000 miles, but it still runs well. Maintenance consists mostly of routine oil changes, filter replacements, and tune-ups. The car would sell for roughly $3,000.
When renewing her auto insurance with Helpful Hands Insurance, Eve decides to drop collision coverage to save $300 per year.
Two months later, Eve is in a collision at an uncontrolled (i.e., no stop signs or traffic lights) intersection. Eve’s Honda is totaled and is no longer drivable. Eve is injured.
Eve is a careful driver and swears the other driver caused the collision. The other driver just as forcefully insists that Eve was at fault. After a quick review, the other driver’s insurance company backs its driver and refuses to take responsibility for the collision.
Eve turns to her own auto insurance company, Helpful Hands. Helpful Hands tells Eve it will not pay for the Honda because Eve has no collision coverage.
Eve now has no car to drive to work or her doctor’s appointments.
Public transportation doesn’t reach her doctor’s office, so she must rely on friends and relatives to drive her. When she can’t find someone, she will have to miss her appointment.
She can take the bus to work. However, she must get up an hour earlier given the bus schedule. Her doctor has told her she needs to rest.
With no car, a lack of sleep, and missed doctor’s appointments, Eve’s work suffers, and her injuries linger. She is constantly anxious. She hurts most of the time, but she can’t stop working. If she loses her job, she can’t pay rent. If she loses her job, she can’t save enough to buy a new car.
Eve decides to sue the at-fault driver, but a hearing on the case will not occur for six months. Eve can’t wait to see if the hearing will result in any compensation for her.
Eve decides to quit her job and move back in with her parents while she recovers.
As the example describes, the decision to forego collision coverage can have serious and negative consequences. Cars are so important in most of our lives, going without one may result in a growing cascade of troubles. As a result, unless you have enough in savings to support yourself in times of trouble, it’s best to purchase collision coverage.