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Insurance - Head Matters


6. Auto Insurance

b. Collision Insurance

Collision insurance is designed to pay for the repair or replacement of the policy owner’s car in the event of an accident. Many people buy this coverage with a deductible, which is the amount of loss the insured will assume when the vehicle is damaged. For example, suppose the cost of repairing a vehicle is $3,000 and the insured has collision coverage with a $500 deductible. In this case, the insured would pay the first $500 in damages, and the insurance company would pay the remaining $2,500. One way to cut your premium cost is to get a higher deductible, because the higher the deductible, the lower the premiums for this coverage. Insurance companies will not pay more than book value to fix a vehicle or what the vehicle was worth before an accident.

A few insurance companies will write collision coverage with the provision that they will replace a car with a new car if the vehicle has been totaled. Keep in mind, though, that the premiums for this type of coverage are higher than if the insurance company based its coverage on the book value of the car.

You should drop collision coverage if your vehicle becomes so old that it has little book value. For example, if you have a car worth $1,000 and collision coverage with a $1,000 deductible, the insurance company won’t pay you anything if your car is damaged in an accident.

Last year Jermaine was in an accident. He had insurance with a $500 deductible. The cost of fixing his Saturn was $4,000, but his car was worth only $3,000. Most insurance companies would consider the car “totaled,” or damaged beyond repair, and award a cash settlement equal to the value of the car less the deductible — in this case, Jermaine took the $2,500 ($3,000 minus $500) and put it toward his college savings. Jermaine rides his bike these days.

Who might benefit from buying Collision coverage?

  • If your car is financed or leased, the finance company will probably require that you carry this coverage.
  • If you have a newer vehicle or one in excellent condition, you may need this coverage to replace or repair the vehicle in case of loss.
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