Insurance » Auto Insurance » What is Collision Insurance? Full Simple Guide For Beginners
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What is Collision Insurance? Full Simple Guide For Beginners

Collision insurance is essential for all kinds of drivers. Here's a short and simple guide on how it works, what's covered and how to choose one.
Author: Russell White
Russell White

Writer, Contributor

Experience

As a finance geek and Content editor with 13 years of journalism experience, Russell makes sure every article has the right flow, edits for accuracy, and consumer value. In addition, Russell contributes his own ideas about budgeting, savings, and credit cards.

Review & Fact Check: Baruch Mann (Silvermann)

Russell White

Writer, Contributor

Experience

As a finance geek and Content editor with 13 years of journalism experience, Russell makes sure every article has the right flow, edits for accuracy, and consumer value. In addition, Russell contributes his own ideas about budgeting, savings, and credit cards.
Author: Russell White
Russell White

Writer, Contributor

Experience

As a finance geek and Content editor with 13 years of journalism experience, Russell makes sure every article has the right flow, edits for accuracy, and consumer value. In addition, Russell contributes his own ideas about budgeting, savings, and credit cards.

Review & Fact Check: Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Financial Expert, The Smart Investor CEO

Experience

Baruch Mann (Silvermann) is a financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. See how we make money.

Typically, the states with the most inexpensive car insurance rates have lower population densities and less costly lawsuits and accidents. This chart showing The Zebra data on the average annual premium costs, shows that the state of Maine offers the least costly car insurance. This is closely followed by North Carolina and Virginia.

However, there is only a 25% difference in cost between Maine and the 10th least expensive state, Indiana. This is a different trend compared to the most expensive car insurance states, where the cost can be significantly different.

10 Most Inexpensive States for Car Insurance in 2020

What is Collision Insurance?

If your vehicle is damaged due to an accident, whether with another vehicle or with an object, collision insurance is what’s going to cover the costs and get you back to driving again.

For those who are leasing or otherwise financing a vehicle, it’s likely that collision coverage is required. Otherwise, you get to choose whether you want collision coverage or not.

The best thing about this coverage is that it will help you to repair your vehicle or even replace it if there’s ever an accident. That includes single-car accidents or object accidents as well as those that involve another vehicle. On the other hand, this coverage isn’t going to help you with medical coverage, the damage that happens when the vehicle is not being driven or damage to someone else’s vehicle as a result of an accident.

It's important to note also that this type of insurance will have some type of deductible. While you generally get to choose what that deductible will be, you’re not going to have too many options. You might have a deductible of $1,000, for example, which means that if you get into an accident you’re responsible for the first $1,000 required to repair the vehicle.

It’s also important to note that there’s a limit to what your insurance company will pay for your damages. Generally, they won’t pay more to fix the vehicle than it’s worth.

Collision Insurance – Example

Let’s say you’re driving a vehicle worth $20,000 and you end up rear-ending a vehicle worth $35,000. If the accident is serious enough that both vehicle are totaled you have to look at what your policy will cover.

If you have property damage liability limits of $40,000 and you’re your general limit is $15,000 for collision. And you have a $1,000 deductible for both of your policies, what’s that going to look like when it comes to paying for the accident?

Your total damages are your vehicle plus the other vehicle.

That means it’s $55,000. But your liability will cover $34,000 and your collision will cover $14,000 (because you owe $2,000 to meet the deductible for each of those policies). Even though your liability coverage is $40,000 the insurance company won’t pay more than the total value of the vehicle.

So they only pay $35,000 less your deductible. That means a total of $48,000. The remaining $7,000 is going to be yours. And it’s going to increase your premiums.

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How Much Does Collision Coverage Cost?

Should you have collision coverage? Well, that’s going to depend on how much you’re paying for it versus how much it would cost you not to have it. As we’ve already shown, you can save a whole lot of money by getting collision insurance. And the rates are somewhere around $600 a year.

Compared from state to state, you’ll generally find a collision policy with a $500 deductible to cost you around $600 a year. That’s definitely not bad, but it’s going to depend on different factors. The state you live in, your age and gender, your driving record, your credit record and even the vehicle that you drive are all going to play a part in this process.

Insurance companies will actually look at all of these factors and use their own proprietary algorithms to figure out just how much to charge you. For example, some vehicles are more expensive to repair or tend to be involved in accidents more frequently. That can impact just how much your insurance premium costs and how much your collision insurance costs as well.

Add in your driving record and you’re definitely going to have a rate that varies from others you know. If you have a great driving record you might be able to get collision insurance much cheaper than someone else who has a bad driving record.

How Do I Get Compensation?

If there’s a total loss and you have collision insurance you will generally get money to cover the cash value of the vehicle. That doesn’t mean you get the money you paid for the vehicle but how much it would have been worth to sell immediately before the accident. That means the insurance company factors in depreciation and other factors to decide just what you get.

Usually it’s an estimator from the insurance company who makes the final determination over what you’re going to be entitled to. They will take a look at the vehicle and possibly work with a mechanic to find out how much it would cost to repair the vehicle under the policy agreement. From there, they decide how much the vehicle is worth and whether those numbers are worth it. If the vehicle isn’t worth fixing then they will pay you out for it.

What isn’t Covered by Collision?

Collision insurance isn’t a catch-all insurance policy. Actually, there are a number of things that it doesn’t cover. It won’t pay for medical bills, for example. It also won’t provide you coverage if you get hit by someone who is uninsured or underinsured.

You’ll need a separate policy to pay for this. Also, you won’t get anything if your vehicle is vandalized or stolen or if another person is injured.

Do You Need Collision Coverage?

Any state does not need you to maintain a collision insurance policy. If your vehicle is leased or you still owe auto payments, your lender may compel you to obtain a collision policy.

Even though you are not required to have collision insurance, it is still a good idea to get one. After an accident, a collision insurance coverage can protect you from pricey repairs or replacements. If you are in an accident where the other driver is at fault, the other driver's insurance may not cover the full cost of your vehicle's damages, and your collision coverage can cover the remaining costs.

If you are determined to be at fault in an accident, your liability insurance coverage will only cover damages to the other driver's vehicle, not your own. Unless you have collision insurance, this means you'll have to pay for all of your auto repairs out of pocket.

Collision insurance may not be worth it if you have an old car or if the value of your automobile is low. Estimate the worth of your vehicle and remove your deductible to see if a collision insurance policy is good for you. The maximum value you can get from a collision insurance policy is that amount. To see if collision insurance is worth it for you, compare this to your collision insurance premium.

Collision Vs Comprehensive Insurance

These two policies are often referred to interchangeably or together and that makes it difficult for some to figure out what each one covers.

Collision coverage is responsible for things that are primarily within your control.

So, if you’re in an accident that involves you and anyone or anything else (or even just you) that’s covered under your collision policy. Accidents also require you to be driving at the time of the accident.

On the other hand, comprehensive coverage is for accidents that are out of your control.

This could be carjacking, deer, hailstorms and other weather related emergencies. They still happen while you are driving, but you don’t have any control over the event and generally don’t have a lot of control over what happens during that event. These are not ‘at-fault’ accidents or damage.

With most insurance companies a claim that results from an at-fault claim is likely to increase your premium. That includes most collision claims. Claims that result from things that are not at-fault are less likely to increase your premium. That includes most comprehensive claims. Some states even prohibit insurance companies from increasing your rates because of a comprehensive claim.

The best thing you can do is take down all the information you can for any type of claim and make sure that you report it properly to your insurance company.

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Choosing Your Collision Deductible

Choosing a deductible means that you are choosing how much you will be responsible for if you’re ever involved in an accident that is covered under your collision insurance. You want to look at things like:

  • How much your vehicle costs
  • How much repairs cost for your vehicle
  • How much you want to pay for repairs

If you get a higher deductible you’ll have lower premiums but you’ll be responsible for more of the expenses if you ever need to make a claim.

Is Uninsured Motorist Covered?

Collision insurance may help you with uninsured or underinsured motorists, depending on the type of accident that you are involved in. There is a completely separate policy that is usually used for this type of situation, however, and it’s usually worth it for you to have that added coverage.

Uninsured/underinsured motorist coverage is generally not that expensive and it can protect you against other motorists while also helping to reduce the amount of premium increases after a not-at-fault accident.

Tips for Buying Collision Auto Insurance

When it comes to buying coverage you want to know what your particular insurance company is going to charge you and what you’re going to get covered.

You want to do your research and make sure that the policy you choose is going to keep you protected and ready for everything. That means looking at things like reviews for the insurance company that you’re thinking about working with. You want to make sure you know how other people like them (or don’t).

You’ll also want to look at quotes and different types of coverage that are offered. All of this should be specific to you and your situation rather than general since each person is going to be different.

You can even fill out the forms and paperwork online to get an accurate quote and find out more about what you could get. Make sure that no matter what you do you’re looking around at different options before you jump in with one company.