Car insurance is just as much of a gamble as playing the slots in Vegas, except that you don’t have the opportunity to actually win money. When you purchase car insurance, you have a choice about which products to choose: liability, comprehensive, collision and a host of riders and addenda.
Liability insurance is almost always a necessity. Only a couple of states don’t require it, and without liability coverage you place yourself at a serious financial risk. Comprehensive and collision coverage, however, are purely voluntary, and many drivers choose liability and collision coverage only on car insurance.
What is Collision Coverage?
Collision coverage, according to Kiplinger, works the same way as liability, except that it protects your car rather than someone else’s property. If you get into a car accident, your liability insurance pays for the damage you cause to the other guy. Collision pays for fixing your own vehicle.
What is Comprehensive Coverage?
Comprehensive coverage, on the other hand, pays for losses related to theft, vandalism, natural disasters and other circumstances beyond the control of the policyholder. For example, if a hurricane hits your town and your car is damaged by flooding, your insurance company will pay to repair or replace the vehicle.
Making the Switch to Collision Coverage Only
Many drivers choose to carry liability and collision coverage only because an accident seems far more likely to occur than a theft or tornado. And usually they’re right. In many places, the threat of dangers that require comprehensive insurance is so minute that spending the money on additional insurance feels like throwing money away.
Carrying liability and collision coverage online is ideal in areas where car theft is not common, where vandalism is not a regular occurrence and where natural disasters rarely strike. If you live in an area where flooding or forest fires strike with regularity, this is not the best choice.
It might also be prudent to carry liability and collision coverage only if your car is very old or has depreciated significantly. In this case, it might cost more to keep up with the insurance than it would cost to replace the vehicle in the event of a total loss.
Dangers of Collision Coverage Only
Liz Pulliam Weston of MSN suggests that dropping comprehensive might not be a good idea if you intend to travel frequently. Eliminating this coverage from your car insurance policy will mean you aren’t covered in rental cars either, which necessitates the purchase of additional insurance (or the assumption of significant risk).
You might also be legally bound to carry comprehensive and collision insurance if you’ve financed your vehicle, regardless of how old it is. Banks and other financial institutions often require borrowers to carry higher levels of car insurance than the state law. This protects their investment in your vehicle.
Other than that, the decision to carry collision coverage only on your car insurance is a personal decision. If you have significant cash reserves and an older car, paying out the extra money for comprehensive insurance might be draining your bank account unnecessarily.
Liz Pulliam, “Dump the Insurance on Your Clunker,” http://articles.moneycentral.msn.com/Insurance/InsureYourCar/DumpTheInsuranceOnYourClunker.aspx?page=2>.