D. Auto Collision Coverage
Auto collision coverage covers your vehicle for damage that results from an
accident. Collision damage isn't limited to driving down the road and colliding with
another vehicle. If your vehicle is parked in a parking lot and damaged by another
vehicle, that is also considered collision damage. Hopefully, the party at fault will be
considerate enough to leave you a note with the necessary information allowing you
to claim your vehicle damage on their property damage liability. If not, the damage
is covered by the collision coverage on your auto policy, less your deductible.

How Collision Coverage Works
Collision coverage and claim procedures vary from company to company. It
is important that you check with your current insurance company to be sure their
procedures are structured to meet your needs. You may need to shop insurance
companies if your current company doesn't offer what you need.

Collision claims, depending on the coverage selected, are settled in the
following ways:
1. Actual cash value at time of loss. The insurance company will only pay
you what your vehicle is worth on the resale market at the time of loss, less your
deductible. This is assuming that your vehicle is a total loss.
2. New for old replacement. This coverage allows you to replace the
vehicle with a new one of like make, model and current year. This is an option with
most insurance companies and available only on new vehicles at time of purchase
or lease. Depending on the insurance company selected, there may be an additional
charge for this provision but it is helpful to keep you from being "upside down" on
a vehicle obligation if a total loss occurs. What I mean by "upside down" is when
the balance of your loan or lease obligation is higher than the value of your vehicle at time of loss. This can happen in the first three to four years after you purchase or
lease a new vehicle. If that happened, you would be personally responsible for the
difference unless you had new for old coverage.

What About Repairing A Vehicle?
Repairing a vehicle can be handled in several ways. The first way is to repair
the vehicle with manufacturer replacement parts. This is the most expensive option
for an insurance company and therefore seldom used. The most common method
is to use "after market parts." After market parts are parts that have been
manufactured by someone other than the original manufacturer of the vehicle. Some
insurance companies even authorize the use of "used parts" to repair your
vehicle.

In my view, it isn't a big deal either way as long as the work is done correctly
and the used part isn't a wear part. What I mean by a wear part is a part that can
wear out, such as an axle on a four wheel drive vehicle or some other mechanical
part. A non-wear part such as a hood, side or quarter panel doesn't matter as
much. If you live where rust is a problem, you wouldn't want used auto body parts
for obvious reasons. After market parts are not a problem unless the thickness of
the metal is reduced from original manufacturer's specifications. If you use a
reputable body shop for the repairs, your vehicle may be rebuilt better than the
original manufacturer's work.

If these issues are of concern to you, check with your current insurance
company. Also when shopping for auto insurance, add this to your list of questions
to ask.

Evaluate Risk Vs. Cost

A common mistake people make when buying collision coverage is an emotional one, which is also a very expensive one, and hard to convince them otherwise.
Many people purchase a new vehicle and want a low collision deductible. They are
emotionally attached to their purchase and feel that the lower deductible provides
better protection for their investment; however, that is the opposite of correct thinking.

For example: you traded in your old buyback vehicle and purchased a new $25,000
vehicle. On the old car you had a $250 deductible on collision coverage. Most
people wouldn't think of increasing their deductible to $500 or$1,000 on the new car
because they are looking at the value of what they just purchased rather than looking
at their true risk, the deductible! Whether your vehicle is worth buyback or $25,000,
your risk is only the deductible.

The truth of the matter is the higher the value of the vehicle, the greater the
savings by going to the higher deductible! You have to evaluate your risk (the
deductible), and compare it with the savings realized by having the higher deductible.
This applies not only to purchasing a new vehicle, but right now with your existing
vehicle(s).

For example: you have a vehicle worth buyback and the cost of collision
coverage with a $250 deductible is $250 per year. Raising the deductible to $500
would reduce the collision coverage cost to $175 per year. The question is this, is
the $75 per year savings worth risking an additional $250? This gives you a 3.3
year break-even period, which means it will take 3.3 years to save the $250 of
additional deductible risk you took by changing your collision coverage to the $500
deductible. You figure this by dividing the $75 savings realized each year, into the
$250 of additional risk. What do you think your odds are of having an accident in
the future? A better way to evaluate this is to ask yourself, "How many times in the
last X number of years have I had to use my collision coverage and pay my
deductible?" Your past experiences are an excellent guide to the future. This is one
of the tools the insurance companies use to evaluate you as a risk. Remember, if
the other party is at fault, you can claim your damage under their property
damage liability assuming they have coverage.

Now let's use the same example, only this time lets look at a more expensive
vehicle, say a $40,000 vehicle. The $250 collision deductible might cost $500 per
year while the $500 deductible might cost $350 per year. Now you are saving $150
and risking the same $250, which is the difference between $250 and $500 deductible, giving you a 1.67 year break-even period. At this point, you may want to consider a $1,000 collision deductible and experience additional savings. The ideal breakeven period is 4 to 5 years, which is a statistically conservative time frame.
Remember, the shorter the break-even period, the higher the incentive to raise
your collision deductible. The savings will vary based on where you live and the
rate structure for that area. The only way to know for certain is to do some shopping
and get the actual numbers.

Now that you have the numbers in hand, the next thing you have to do is ask
yourself the question, "If I choose the higher deductible for the savings, do I have
the ability to pay the higher deductible if something happened today?" If the answer
is no, you should consider keeping the lower deductible and saving the money
required for the higher deductible risk. Once the money is saved and in the bank,
you can then increase the deductible to a higher level where it is comfortable for
you. An added bonus is the money set aside will earn interest and give you additional
savings.

Another common way of thinking about deductibles is now that my vehicle is
older I want to raise my collision deductible. This is not always the best thing to do at
this time since the cost of collision coverage is now lower because the value of the
vehicle is lower, but you are still risking the same amount of deductible. In essence,
all you ever risk is the deductible, whether the vehicle has a high or low value.
An example of this would be if you have an older vehicle with a $500 deductible on
collision and the collision coverage costs $80 per year. You could reduce the collision
deductible to $250, and the coverage would cost $110 per year. You are receiving
$250 coverage for $30 per year which gives you a 8.3 year break-even period,
which is greater than the ideal time frame for a break-even period. This is an
example of a time to consider reducing your collision deductible. There are several
schools of thought in relation to this subject. Let's look at some other possible ideas.

Another way to evaluate your coverage is as follows: Your vehicle is valued at
buyback so you might consider raising the deductible to $1,000 to reduce the cost of
the collision coverage while still having the major value of the vehicle covered. This
will reduce your collision cost substantially. Another idea is to drop collision coverage
altogether and save the collision coverage cost entirely but that isn't always a good
idea. You have to again ask yourself the question, "Can I afford to replace my
vehicle "out of pocket" today?" If the answer is yes and you are willing to take the
risk, you may want to consider dropping collision coverage altogether.

When to Drop Collision Coverage
In my opinion, the only time that it is appropriate to drop collision coverage
altogether, is not when the vehicle is paid off as some people think, but when the
value of the vehicle, less the deductible, no longer makes it a wise investment. In
other words, if the cost of coverage is too high in relation to the value of the vehicle
and you would be able to replace the vehicle "out of pocket," then it's time to drop the collision coverage. For example, if your vehicle is worth $1,500 and you have a
$250 deductible, you're only insuring a $1,250 value and the cost to insure is $150
per year. Is it worth it? Remember, you will always receive salvage value if the
vehicle is a total loss. The salvage value would be around $200 to $300. The answer
to this question may vary, based on your individual financial situation and the cost to
insure versus the vehicle's value.

Classic and Antique Vehicles
Classic and antique vehicles are handled a little differently. These vehicles
are insured on a stated value basis. The value is normally determined by an appraisal
and insured for the amount of the appraisal. Most insurance companies will insure
these vehicles; however, there are specialty insurers who can provide a far better rate on this type of coverage than most of the traditional casualty insurers. The way
to find the best deal on this type of coverage is to look in classic car magazines for
advertisements, or visit car shows and ask the car owners where they buy their
insurance. After talking with several people, you will discover the best places to
purchase this type of coverage.

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