While the law usually only requires drivers to carry liability insurance for their car, lienholders often ask drivers to carry additional coverage. For those who can afford the extra protection, having collision or comprehensive car insurance coverage provides peace of mind. You see, liability insurance only covers damage and medical care for the other vehicle and its occupants; it does not reimburse you for any costs when you are at fault.
Collision and comprehensive auto insurance, however, do cover repairs and medical attention for you, your vehicle, and your passengers. But that does not mean the two policy types are the same. The chief difference between the two is that collision coverage applies to damage caused by a collision while comprehensive coverage applies to non-collision damage, such as theft or hail.
While having both types of insurance is nice, it is not always practical. Here are some things to weigh when deciding which type to carry.
Consider the Ownership of the Vehicle
If you have not fully paid for your car and there is a lien on it, you must carry both collision and comprehensive insurance. Once your vehicle is paid off, you can then decide whether to reduce your insurance coverage.
Use the 10% Rule
Step 1: Check the value of your vehicle on the Kelley Blue Book site. When estimating its condition, it is better to err on the side of a lower condition than higher.
Step 2: Get an estimate for the annual premiums for your car when carrying comprehensive. While it is not necessary to get estimates for collision only or both types to apply the 10% rule, you may wish to have those numbers as well.
To do this, you can call a local insurance company or obtain a quote online from a national provider.
Step 3: Calculate 10% of the amount of comprehensive insurance with the following formula: [annual premium for comprehensive] x .10.
Step 4: Compare 10% of comprehensive insurance with the value of your car. If 10% of comprehensive coverage is higher than the replacement value of your vehicle, it is not in your best interest to carry comprehensive coverage.
Assess Your Finances
Step 1: Look at your bank statements for the past 12 months and calculate your average balance each month. Add together the average balance of each month and divide that number by 12.
Step 2: Add your expenses for each month in the past year and divide that number by 12.
Step 3: Subtract the number in Step 2 from the number in Step 1 to estimate your average monthly disposable income.
Step 4: Subtract your car’s value from your average monthly disposable income.
If the result is a positive number, you can likely afford to replace your vehicle out of pocket and forgo comprehensive coverage. If that number is negative, strongly consider carrying both collision and comprehensive.
While there is no hard and fast formula for deciding which kind of car insurance you need, these evaluations make it easier to make a smart choice. After all, it makes little sense to pay annual premiums that exceed the value of your car or to pass over insurance, which could spell financial disaster in the event of an accident. If you remain on the fence, think about your driving history. If you are accident-prone, the extra coverage may be your best bet.