Is collision insurance necessary for older cars?

Collision insurance is an optional policy designed to help pay for vehicle repairs or replacement following an at-fault accident with other vehicles and stationary objects like a street sign. Once you've paid your insurance company your pre-agreed upon deductible amount, ranging from $200 to $1000, your provider insurance kicks in and covers any remaining expenses.

According to the Insurance Institute of Canada, the average cost of bodywork saw an increase from $72 to $75 an hour over the past year, translating into higher repair costs for vehicles. While having this coverage may seem like a smart decision, it may not make sense for all motorists, especially if you have an older vehicle, given that adding collision and comprehensive insurance to your portfolio will increase your car insurance costs. So, is dropping collision coverage worth the risk? Let's break this down in more detail below.

Hypothetical: When dropping collision coverage makes sense and when it doesn't

To keep or not to keep--that is the question. Let's take a look at a couple of hypothetical scenarios to help you better understand when to drop collision insurance and when to avoid doing so:

Scenario 1: Not having collision car insurance in your plan and regretting it

Emma from Alberta owns a 2015 Toyota Corolla with a market value of $8,000. To save money on her insurance premiums, she decided to drop collision from her auto insurance plan, which saved her a total of $368 on her annual premium.

While driving to work, she got involved in a minor fender-bender that caused damage to her front bumper and lights. After getting multiple quotes from local body shops, repair costs will total $2,449. Because she has no collision insurance, she'll need to pay these costs out of pocket. In hindsight, dropping collision to save $368 on her insurance costs, did not outweigh her repair costs.

Scenario 2: Keeping collision and benefiting from this coverage option

David from British Columbia drives a 2018 Honda Civic valued at $15,000. Despite his car being 7 years old, he decides to keep collision insurance in his plan, making his annual premium $1800.

After getting into a collision with another driver, the total repair costs come out to $6,000. Luckily, David has collision coverage and a deductible amount of $500. Rather than having to pay $6,000 out of pocket, he only needs to pay his insurance company the $500, providing him with financial protection following his accident.

Scenario 3: When dropping collision coverage makes sense

Sophia, a retired senior in Ontario drives a 2010 Mazda, valued at $3,500. With a deductible of $500 and a collision insurance premium of $368, it didn't make sense for her to keep it on her plan as she doesn't drive that often.

Given her sizeable emergency fund and the low market value of her vehicle, she cancelled her collision insurance. Doing so reduced her insurance rates by $1,104 over three years.

Auto insurance costs vs. car value breakdown

When determining whether to maintain or cancel collision coverage, it’s essential that you compare the cost of your auto insurance to the actual cash value of your vehicle. Collision insurance covers repairs or replacements if your car is damaged in an accident. But, as your vehicle ages and depreciates, the payout amount you receive from your claims process also decreases, potentially making your collision coverage less worthwhile.

The same can be said about comprehensive coverage, which provides you with an insurance payout if your vehicle is damaged in a non-collision event, such as a natural disaster, fire, theft, vandalism, or falling object.

The impact of depreciation on collision and comprehensive insurance

According to Driver's Note, vehicles in Canada can depreciate by 15% to 25% annually from the second to the fifth year on average. After the fifth year, they can depreciate up to 60% on average.

When determining whether you should keep your collision insurance as part of your overall car insurance policy, depreciation needs to be considered. As your car ages and its value decreases, the maximum payout you would receive following an insurance claim will also decrease. However, it's important to note that your insurance provider may not lower your premiums proportionately. Take a look at this breakdown of how depreciation should influence whether or not you keep the collision coverage portion of your auto insurance policy:

How to calculate the break-even point to see if collision and comprehensive coverage are worth it

To determine whether you should keep your collision coverage or comprehensive coverage on your plan, calculate the following:

Annual collision insurance premium x years without an accident claim = vehicle market value

Let's say your insurance provider is charging you $368 annually to add collision insurance to your plan, and your car is worth $3,500. In this case, you would need to go 9.5 years without an accident claim on your car insurance to make dropping collision insurance make financial sense ($368 x 9.5 = $3,500).

Should you drop your coverage on an older car?

Your choice to maintain insurance on an older vehicle is guided by the following checklist:

• Given your car's condition and age, it's currently valued at under $5,000.
• You have a good amount of money saved in an emergency fund as a financial cushion.
• You drive infrequently and have a good driving record with little to no accidents (at fault).
• Your collision insurance premium is more than 10% of your car's value.

If these scenarios apply to you, then opting out of collision insurance to lower your car payments will make sense. Now, let's take a look at when opting into collision coverage would be a better idea:

• You own a classic and vintage car and want peace of mind knowing your vehicle is covered should it require potential repairs following an accident.
• You don't own your car outright (typically both collision and comprehensive insurance are required).
• You just purchased a new car or an expensive vehicle.
• You plan on driving a rental car on vacation.
• You've been in a couple of car accidents.
• Given your financial situation, you don't have as much saved in an emergency fund.

Other car insurance you need

While collision insurance and comprehensive insurance are optional, other insurance policies in Canada are mandatory. Depending on which province you live in, you may be required to purchase the following, regardless of whether you drive a new car or an older car:

Third-party liability coverage

Third-party liability insurance protects you if you’re found at fault in an accident that damages someone else’s property or causes injuries to others. This insurance coverage can help with third-party medical bills, repair or replacement costs, and legal fees.

Accident benefits coverage

Accident benefits coverage covers you and your passengers if you’re injured in a car accident, no matter who was at fault. This includes extra support like medical and rehab costs, attendant care, and benefits for caregivers, non-earners, and income replacement.

Uninsured motorist coverage

Uninsured automobile coverage is mandatory in some parts of Canada. This coverage steps in if you’re in an accident with a driver who doesn’t have enough insurance or has no insurance at all. It also covers hit-and-run situations where the other driver can’t be identified.

Optional coverage on an older car

While you still may choose to opt out of collision car coverage or comprehensive car coverage, you may want to purchase another type of optional car insurance policy like the following:

Accident forgiveness

One final type of optional car insurance coverage popular among drivers is accident forgiveness. Accident forgiveness is additional coverage that can be added to your car insurance policy as an endorsement, to protect your driving record and to help prevent your insurance premium from increasing if you have an at-fault accident claim. Note: coverage varies by province.

Looking for affordable car insurance? Contact BrokerLink today!

While it isn't mandatory, collision coverage can be an essential type of insurance coverage depending on the type of vehicle you have and your financial situation.

At BrokerLink, we help Canadian motorists purchase affordable car insurance. Whether you're in the market for collision and comprehensive coverage have further questions about whether dropping optional policies can lower your rates, or need help navigating your claims process, our experienced brokers are here to help.

To work with an insurance broker from our team, give us a call over the phone or contact us over email! You can also get a free insurance quote using our online quote tool that's available on all devices!

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