Is Collision Coverage Ever a Waste of Money?

Don't waste money on premiums for coverage that doesn't make sense.

Many drivers who buy auto insurance opt for collision coverage in addition to other types of protection such as liability insurance. Collision coverage pays for the repair or replacement of the policyholder's vehicle in the event the policyholder causes a crash to occur.

Collision coverage isn't required by law, unlike liability insurance which most states mandate that drivers buy. For motorists with an auto loan, collision coverage is generally required by lenders because the car serves as collateral and the lender wants to protect against losses. This type of insurance is generally also required for leased vehicles because the dealership wants to ensure the insurer will pay if a leased car is damaged or destroyed.

But if it's not required, motorists must make a choice about whether to pay extra premiums for collision coverage. While in many cases it makes sense to do so, there are some circumstances when it's actually a waste of money.

When is collision coverage a waste of money?

Collision coverage can end up not being worth the premiums if the car that is covered isn't worth much money. And that's especially true in circumstances where there is a high deductible on the insurance policy.

Say, for example, that collision insurance would cost $300 per year and a driver is considering buying it for an older used car worth just $2,000. If the driver had a $1,500 deductible, then the insurer would only pay out a total of $500 if the car was totaled. And since insurers look at the value of the vehicle versus the cost of repairs when deciding whether to total a car or pay for fixes, the insurance company likely wouldn't pay much more than that to repair the car after a crash occurs.

Paying $300 per year in exchange for the possibility of getting a $500 payment after a crash most likely would not be worth it. If the driver didn't get into a collision during their first 20 months, then they'd end up worse off for having paid for coverage. In this case, they'd have paid around $25 per month for collision protection that gives them no more than a $500 payout. If they'd saved the $25 per month, after 20 months they'd have ended up with the full $500 maximum the insurer would've paid in the event of a crash.

Always consider the cost of insurance premiums

Ultimately, motorists must think carefully about how much an insurer would pay in the event their car was totaled or damaged, and compare that to the premiums they will owe to put collision insurance in place. If the insurer wouldn't pay out much more than the amount the motorist pays in premiums over the course of the year, then chances are very good buying collision coverage isn't worth it.

In this situation, instead of sending the money for a collision insurance policy to the insurance company each month, drivers would do better to put it in a special bank account earmarked for vehicle repair or replacement. That way if something goes wrong, they'll have the money to cover it. And once they've saved enough to fix the car, they can keep the extra for other uses, leaving them better off in the end.