Collision and Comprehensive Coverage

The Difference Between Collision and Comprehensive Coverage

Collision coverage involves any damage to your own vehicle as a result of its operation on the road, or due to the operation of other vehicles on the road, whether or not the covered driver was at fault, it was caused by some other driver, or whether it was a matter of road conditions.

While this generally applies to your vehicle while it is moving, striking something or being struck by something and suffering damage significant enough to make a claim for compensation, if it is struck and damaged by a moving vehicle while parked, this also falls under the umbrella of collision coverage.

Collision and Comprehensive CoverageWhile it is unlikely that one would be held at fault for damage to one’s vehicle while parked, should the driver who collided with it not be covered by insurance, one’s collision coverage may be used if needed.

Collision insurance therefore protects one’s vehicle from damages caused by it colliding with something or another vehicle colliding with it. There are situations which fall outside this scope though, it being damaged by natural events or stolen, and these events are covered under the comprehensive category of an auto insurance policy.

If your car gets broken into and vandalized, or if it is lost due to theft, or if a tree falls on it or hail damages it, or a rock hits your windshield while driving, these are all incidents that are addressed by comprehensive auto insurance.

Both collision protection and comprehensive coverage are optional, and therefore we need to decide whether we want both or one or the other, even though often times they are packaged together by insurance companies and therefore can’t be purchased separately.

With that said, if a vehicle is worth insuring against either, it is worth getting both coverages, and the things that we think about to decide this, especially the value of the car, are going to have us wanting to protect the value of the car or not.

Should we choose to protect it against the losses or damage that these coverages provide, we should really be selecting both anyway.

Looking to Insure Lower Value Vehicles with Collision and Comprehensive

If the value of our vehicle is very low, under $3000 for example, then it really won’t make much sense to purchase either of these coverages. Insurance is really designed to protect us against losses that we cannot bear ourselves, and losing a vehicle of such a small value generally wouldn’t be one of these.

Even in cases where an individual may be placed in an uncomfortable situation if they lost their car that was only worth a couple of thousand dollars, because they don’t have the money to buy another, and cannot easily borrow the money for it either, even people with bad credit can usually get some sort of financing these days. While the rates may be very high, the extra you pay for collision and comprehensive insurance can be an even worse deal in these situations.

This is because the cost of this coverage, like all insurance coverages, is going to include an amount that the insurance company keeps as profit over and above their expected payouts from claims.

If we had to get a high interest loan to buy a comparable car, one worth just a few thousand, the extra interest on this amount really wouldn’t amount to all that much and if we can afford to pay for the extra cost of the policy, we could afford a loan like this.

We could instead just bank what we would spend on this policy in this situation and use that as a fund to rely on should an incident happen where we would be using the insurance.

Another consideration is that collision and comprehensive policies both involve deductibles. While we can sometimes purchase this with no deductible, the extra cost of not having to pay the deductible will not be a good deal for us, for the same reason as buying collision and comprehensive insurance on a vehicle that isn’t worth much is not a good deal.

If your car is only worth $2000 and you have a policy that has $1000 deductible, then neither the first thousand dollars of deductible nor the second thousand dollars of coverage will be worth the cost.

There are some decisions about auto insurance which do require a fair bit of thought, like for instance whether we should purchase collision and comprehensive insurance on it in some cases, but whether we should insure the first small amount should not be one of them. This simply doesn’t make sense, even though a lot of people choose lower or no deductibles with their auto insurance policies.

Choosing Collision and Comprehensive with More Valuable Vehicles

If you have a secured loan out on your vehicle or it is leased, maintaining collision and comprehensive coverage on it will be mandatory. The company who is lending the money or the leasing company have a financial interest in it not being lost to accidents, natural events, or theft and vandalism, and they do want to make sure that you are protecting them with the proper insurance coverage.

Many people buy cars with secured loans or lease them, and virtually all new cars are bought this way as well as a majority of used cars. If you need to borrow the money, then it’s generally a good idea to have complete protection for the vehicle as you do not want to lose the car and still need to make the payments.

This can place you in a pretty bad spot since you now need another car and you already have this payment to make, and may not be able to afford a second loan or lease. You may not be able to even obtain one, given that people usually buy the best car they can afford or close enough to this that maintaining two of these payments is not a viable option as this would exceed their capacity to repay.

Some people use unsecured loans to buy vehicles though, and in this case, the loan is extended to borrowers based upon their good credit and ability to repay, without placing a lien on the vehicle or placing any restrictions at all on what they use the money for.

While lenders would not require us to purchase collision and comprehensive insurance in this case, the same considerations would apply to our own situation, where we need to be aware of the consequences of the car being lost or significantly damaged and ensuring that these events will not get us into financial trouble.

Unlike many things, having a car for a lot of people is not a luxury at all, and it can even be seen as a necessity. Having to get around without one can be a great inconvenience as well as an additional financial burden, as the costs of hiring car service or taxis can be significantly more depending on the situation.

One may even not be able to earn a living, or at least the same living as one was earning before they lost their vehicle, especially if one uses it for work. There are also cases where it is used to travel to work and there may not be any other good options.

People willingly pay ridiculous interest rates to buy vehicles, 40% or even more, and this is because the need for the vehicle can be so high that even this amount of interest ends up being acceptable overall.

Deciding on the Importance of Collision and Comprehensive Coverages

Since the role of insurance is to protect us against events that we cannot bear without at least significant financial hardship, if that is the case if your vehicle is lost or significantly damaged, then the decision to purchase collision and comprehensive insurance should be an easy one.

While this coverage can cost a fair bit of money, a couple of hundred dollars a month in some cases, or even more depending on your risk factors, it is still very important to make sure that we are sufficiently protected against events we will not be able to handle if they occur.

If one finds it difficult to pay for this, foregoing the coverage isn’t a good idea if it is really needed, and once again, it is required if the vehicle is not owned free and clear. Many people pay too much for auto insurance though, and prices do differ quite a bit among insurers, and people generally do not shop around enough to even be aware of these differences.

If you are having difficulty paying for collision and comprehensive insurance due to it being a little unaffordable, shopping around can really help here, as well as choosing higher deductibles, two things everyone should be doing anyway.

If that isn’t enough, then the money will need to be saved elsewhere, by cutting back on discretionary spending. If collision and comprehensive insurance are really needed, they are not really discretionary and therefore need to be prioritized accordingly.

Whether or not we should purchase these coverages is often but not always an easy and clear decision. We may be told that the threshold is around $3000, but that might be a little too low actually. What if your vehicle is worth $4000 or $5000? Generally, the coverages are recommended in these cases but we still want to make sure we’re thinking about this enough.

This really all comes down to how much this will cost us and how likely we expect that we’ll need to make a claim. The one thing that hardly anyone accounts for enough is the fact that making claims tends to add to the cost of insurance in the future, so the true cost of this isn’t just the added cost of the premium, it is the additional premium costs should we need to use it.

This cashes out to our only wanting to use insurance coverage if we actually need it, and therefore buying full coverage on our $4000 or $5000 vehicles may not make much sense if we’re able to bear losses of this amount ourselves.

The key element here is financial capacity, and we should only purchase insurance to protect our exceeding it by an uncomfortable amount, not insure against events that we can handle.

As long as we understand that any insurance, including auto insurance, and including collision and comprehensive coverage, is in itself a bad deal, and we need good reasons to take on these bad deals, we will remain focused on what really needs to drive our decisions here, and that’s to avoid the pain of not being able to deal financially with various things that may happen.

How much a car needs to be worth to cover it with collision and comprehensive insurance will therefore depend primarily on our situation, not some arbitrary number, and we need to consider our situation individually to decide such things.

John Miller

Editor, MarketReview.com

John’s sensible advice on all matters related to personal finance will have you examining your own life and tweaking it to achieve your financial goals better.

Contact John: [email protected]

Topics of interest: News & updates from the Securities and Exchange Commission, Stock Markets, Bonds, Loans & more.