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Collision Insurance

The collision insurance coverage is a component of car insurance that pays for damages to the insured vehicle that result from a collision with another vehicle or object. Collision insurance generally covers the amount of damage over and above an amount the insured person must pay, called the "deductible" amount. Collision coverage is normally the most expensive component of auto insurance.

Collision insurance coverage is not required by law in any state. However, if you're driving a car purchased from a dealership or financed through a lender, you may be required by the dealership or lender to carry collision insurance.

Collision and comprehensive coverages usually do not pay for the total loss. You generally have a deductible, an amount you must pay out of your own pocket before your insurance payment takes effect. Suppose, for example, that you have a $300 deductible. On a loss of $1,000, you would pay the first $300 and your insurance company would pay the remaining $700. The higher your deductible, the less you will pay for the policy. You have to decide how much you can afford to pay for repairs if you do have a claim, versus how much you want to pay for your premiums.

If you cause an accident, collision coverage will pay to repair your vehicle. However, you usually cannot collect any more than the fair market value of your car. As your car ages and its value declines, the amount you would collect for a total loss declines as well. Your insurance company reimburses you for the actual cash value of your car or its parts, at the time of the loss. For example, if your car was purchased for $20,000, you will get less than your original purchase price to replace it.

The actual value of the car can be significantly lower than the cost of replacing your vehicle (or your loan balance.) If your car is financed or leased, you will need gap insurance to reimburse you for the difference between what you owe and what the car is worth.

You can check the Kelley Blue Book or the N.A.D.A. Official Used Car Guide to see what is your car fair market value.

Sometimes it may not make financial sense to buy collision and comprehensive insurance on an older car. If you're driving an older car with a very low resale value, the cost of comprehensive and collision coverages for a couple of years may be costing you more than the car is worth! So you have to make sure that the cost of insurance is more economical than the cost of repairing or replacing the car at your own expense.

For cheaper car insurance, consider dropping these policies altogether, especially if you have a poor driving record that inflates your rates.


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