When you’re the proud owner of a new car, the last thing you want is to get into an accident. Unfortunately, accidents can happen to even the most cautious drivers. So what happens if your car is totaled and the amount your insurance company will pay doesn’t cover your outstanding loan? This is where gap (general asset protection) insurance comes to the rescue!
The Pros and Cons of Gap Insurance
Gap insurance, like any other type of insurance, has its own advantages and disadvantages. Let’s take a look at them:
Benefits
Zero Deductible
Unlike collision or comprehensive insurance, gap insurance doesn’t require you to pay a deductible. This means that once your claim is approved, you’ll receive the full claim amount without having to pay anything out of pocket.
Financial Protection
Gap insurance provides you with extra financial protection if your car is stolen or involved in a serious accident that results in a total loss. Instead of paying off your outstanding loan balance with your own savings or continuing to make payments for a car you no longer have, gap insurance covers the difference between your car insurance payout and the amount you still owe your lender.
Considerations
Vehicle Depreciation
As soon as you drive a new car off the lot, it starts to depreciate in value. On average, a new car loses 20% of its value within the first year and 60% within five years. This makes gap insurance a crucial consideration if you’re buying a new car and financing most of the purchase.
Cost
Gap insurance comes at an additional cost. Whether you purchase it from the dealership or an insurance company, you’ll be paying more than if you didn’t have gap insurance. However, if your car is stolen or totaled, the extra cost will be well worth it.
How Does Gap Insurance Work?
Gap insurance kicks in when your car is deemed totaled by your insurance company, and the amount it’s valued at is less than what you owe on your loan.
When your car is deemed totaled, the insurer will assess its actual cash value. This is the amount your insurance will pay you for your vehicle. However, if the value of your car is less than your outstanding loan amount, you’ll still have to repay the loan for a car you no longer have. Gap insurance covers the difference between the car’s actual cash value and your outstanding loan balance, so you won’t have to pay out of pocket.
What Is and Isn’t Covered by Gap Insurance
Before deciding whether or not to purchase gap insurance, it’s important to understand what it covers and what it doesn’t:
What Does Gap Insurance Cover?
Gap insurance covers the difference between your outstanding loan amount and the value of your car as determined by your insurance company if your car is stolen or totaled.
What Doesn’t Gap Insurance Cover?
Gap insurance does not cover the following:
- Insurance deductible
- Overdue car loan payments
- Extended warranties
- Security deposits
- Lease penalties
- Previous loan or lease carryover balances
- New car down payment
Do You Need Gap Insurance?
In general, it’s a good idea to have gap insurance if you financed a significant portion or the entire purchase of your car. If the depreciation of your car will likely result in it being worth less than what you owe on your loan, gap insurance is worth considering. Other situations where you should think about getting gap insurance include having a loan longer than five years, leasing a car, or buying a car model that depreciates quickly.
Is Gap Insurance Worth It?
The value of gap insurance depends on your individual circumstances. If you owe more on your loan than what your car is worth, gap insurance can save you from having to find the extra money to repay your loan. However, if you have sufficient savings to cover the gap or the difference is minimal, you may not need it.
How Much Does Gap Insurance Cost?
The cost of gap insurance varies depending on where you purchase it from. If you buy it from your lender at the time of car financing, it can cost between $500 and $700. Buying gap insurance through your auto insurance provider typically costs around $60 per year. It’s best to get quotes from multiple providers to compare costs and coverage.
Best Gap Insurance Providers
Several major insurance companies offer gap insurance coverage. Here are some of the best providers:
- Liberty Mutual: Offered in all 50 states, Liberty Mutual provides gap insurance at an average cost of $50 per year.
- Nationwide: Available in select states for cars that are six years old or newer, Nationwide offers gap insurance at an average cost of $43 per year.
- Progressive: Progressive offers affordable gap insurance (loan/lease payoff coverage) with a maximum payout cap. It costs around $49 per year.
- The Hartford: The Hartford provides gap insurance within 30 days of car purchase or lease, but it comes with a higher cost of around $103.
- Travelers: If you purchased your car from a new car dealer, Travelers offers low-cost gap insurance at an average of $36 per year.
Alternatives to Gap Insurance
If you’re not sold on gap insurance, there are alternative coverages to consider:
- New car replacement coverage: This coverage reimburses your vehicle at its replacement cost rather than its actual cash value. It’s more expensive than typical coverage but is helpful for newer cars.
- Better car replacement coverage: This coverage pays for a newer or better model if your car is totaled. The terms vary by insurer, so be sure to check with your provider.
How Do Insurance Companies Decide If a Car Is Totaled?
Insurance companies determine if a car is totaled based on the cost to repair it. If the repairs exceed a certain percentage of the car’s value, it’s declared a total loss. The exact percentage varies by state and insurer.
TIME Stamp: Consider Gap Insurance if You Plan on Financing a New Car
If you’re financing a new car and expect it to depreciate quickly, gap insurance is a smart investment. It protects you from being stuck with a car loan balance higher than your car’s value if it’s stolen or totaled.
Frequently Asked Questions (FAQs)
- How can you get a gap insurance refund from a dealership?
If you paid for gap insurance outright, you may be able to request a refund from the dealership. Contact them directly to inquire about cancellation fees and prorated refunds. - How do you know if you have gap insurance?
You should know if you have gap insurance since it’s an additional purchase. Check your car loan or lease terms or ask your insurance provider. - How do you use gap insurance?
If your car is totaled and you owe more on your loan than the car is worth, gap insurance comes into play. Contact your insurance company or agent to learn how to file a claim.
Remember, protecting your financial well-being is essential when it comes to car accidents. Gap insurance can be a lifesaver in these situations, so make sure to consider it wisely.