Collision insurance covers damage to your vehicle caused by a covered accident, regardless of fault.
This might involve a collision with another vehicle, or it could cover costs to fix your vehicle if you encounter a pothole or other hazard. This insurance applies only to your auto. It doesn’t cover whatever your vehicle collided with – that would be covered under your property damage liability coverage if you were found legally responsible for the accident.
Although collision insurance is not required by any state, your lending institution may require this coverage if you are financing your auto. If your vehicle is involved in an accident and considered “totaled” (when the repair costs exceed a certain threshold of the vehicle’s value), you and your lending institution would be protected up to the actual cash value (ACV) or “fair market value” of the vehicle.
Collision coverage is usually sold with a deductible amount. A deductible is the out-of-pocket expense the insured agrees to pay before any payment from the insurance company kicks in. Deductibles of $250, $500 or $1,000 are fairly common. As a general rule of thumb – the higher the deductible, the lower the corresponding coverage premium.
If you are financing your auto—depending on the term of your loan—it’s possible that the vehicle will depreciate more quickly than the value of your loan. Keeping track of your vehicle’s depreciation can help assess the benefits of paying the difference to the lender, or purchasing gap insurance, which generally covers the difference between a vehicle’s actual cash value and the sum owed to the lender.