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Some types of auto insurance are mandatory in most states. This includes liability insurance. But other auto insurance protections are optional -- including collision insurance.
Although no law requires collision insurance, most people should still buy it according to the finance expert Dave Ramsey. In fact, unless two very specific things are true, Ramsey believes getting this coverage is essential.
Why does Dave Ramsey believe drivers need collision coverage?
To understand why Ramsey thinks it's important to buy collision coverage, it's helpful to know what this kind of insurance does.
"Collision insurance covers the cost to repair or replace your car if you're in an accident with another vehicle or object," Ramsey explained. "No matter who's at fault, collision covers your vehicle as opposed to liability, which covers other people's vehicles or medical bills."
Basically, as Ramsey explains, required liability protection pays only for other people's damages a policyholder causes. Collision coverage pays for damage to the policyholder's own vehicle. And Ramsey says it's very important to make sure to have insurance coverage that will do that. "Without it, you'll be on the hook to replace your car if it's totaled."
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What are the exceptions?
Although Ramsey has made clear that most drivers need collision insurance because they could face huge costs without it, he does explain that there are two possible exceptions to this general rule.
"The only time you might not need collision is if your car is paid off and, again, you could replace it from your savings," he said.
The first point about the car being paid off is really important. In the vast majority of cases when drivers have a car loan or are leasing a vehicle, they will be required by their lender or lease provider to have collision coverage in place. The lender wants to protect the vehicle that serves as collateral and so lenders mandate insurance coverage so the insurer will send out a check if the car is destroyed. Without insurance, a driver could get stuck paying off a car loan on a vehicle that was damaged beyond repair.
But even for drivers without a car loan, Ramsey believes collision coverage is still necessary unless they can pay to replace their car out of savings. That's because most people can't and wouldn't want to just pay cash to replace their entire car when something happens to it in an accident. This could be a huge financial burden, but it would be the reality motorists without collision insurance would be looking at.
Ultimately, Ramsey's advice on this issue is really good. Drivers who have car loans absolutely need collision coverage and those without loans should think both about whether they could afford to replace their vehicle out-of-pocket -- and whether they would want to.
When considering this possibility, most people (except those with very low-value vehicles) will likely decide that their best course of action is to pay for collision coverage. Premiums for this add-on coverage are usually pretty affordable and are well worth the extra protection this coverage offers.
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