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What is Collision Insurance?

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Every insurance buyer needs to be able to answer the question, what is collision insurance, in order to determine whether they need it. Collision insurance is a type of insurance policy coverage that protects you from the financial loss associated with having to repair or replace your car when an accident occurs. It is distinct from liability insurance and comprehensive coverage and can provide you with more complete protection. However, not every insurance buyer needs collision insurance. Therefore, finding out what is collision insurance is key to making sure you are protected, but not wasting your money.

What is Collision Insurance

Understanding collision insurance involves understanding each of the major types of situations that insurance policies cover:

  • Liability insurance covers damage that you cause to someone else. If you get in an accident, your liability insurance will pay to repair or replace the other person's car. Your liability insurance will also pay medical bills, lost wages or other damages incurred by a person you injure in an accident. If you get sued, your liability insurance will take care of the medical bills
  • Comprehensive Insurance protects your car in most non-accident situations. If your car is stolen, damaged by fire, flood, hail or other natural disaster, or vandalized, comprehensive insurance will pay the bill for replacement or repair. The exact situations covered by comprehensive insurance vary, but in most cases it covers almost any incident that occurs to your car when it isn't being driven.
  • Collision Insurance protects your car when it is being driven. If you get into a collision with another person, collision insurance pays to repair or replace your vehicle, even if the accident was your fault. If you get into a single-driver accident, such as hitting a telephone pole or veering off the road, collision insurance will pay. In other words, it is the counterpart to liability insurance, giving you the same protection if you hurt yourself as other's would get if you hurt them.

Do You Need Collision Insurance?

Collision insurance is not mandated by law, unlike liability insurance. If you lease a car or have a car loan, your lender may require you to carry collision insurance as a condition of the loan. However, if you own your car outright, there is no requirement that you own collision insurance.

Whether or not you should buy depends largely on the value of your car. If you have a more expensive car, it may make sense to transfer the risk of damage to the insurance company. If the Bluebook Value of your car is low, however, often the added premiums are not worth transferring the risk. For example, if your car is worth $1000 and you have a $500 deductible, you would only receive $500 in the event that your car was stolen or declared a total loss. If it costs you an extra $200 per year to have collision insurance, it is generally not worth paying the extra $200 in premiums for a potential $500 payout.

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