What is Gap Insurance?
The weather will be warm again in just a few months, which means you’re probably starting to think about traveling and planning road trips — and possibly buying or leasing a new car. Before you do, you might want to think about gap insurance.
Gap insurance is a relatively inexpensive auto endorsement you may want to consider if you’re buying or leasing a new vehicle.
Here is what you should know about gap insurance and when you might need it.
What is Gap Insurance?
Gap insurance is a popular auto insurance endorsement that helps pay off your auto loan if your car is totaled or stolen and you owe more than the car’s depreciated value. In other words, it helps pay the difference between the actual cash value of your car and the balance of your loan or lease at the time of the accident or loss*.
This type of insurance may also be known as “loan/lease coverage.” It’s available only if you’re the original loan holder or leaseholder on a new vehicle.
How Gap Insurance Works
Whenever you purchase or lease a new car or truck, the vehicle begins to depreciate in value as soon as it leaves the car lot. Different vehicles depreciate at different rates. In general, new cars lose 23.5% of their manufacturer’s suggested retail price after a year (1). Standard auto insurance policies will only cover the depreciated value of your car or the prevailing market value of the car at the time of an accident. That means you may still owe money to the bank or leasing company if your car is totaled, and you still owe more than the car’s actual value. This is where gap insurance comes in.
Imagine you get into an accident and your car is totaled. If you owe $18,000 on your car loan, you still have to pay that to the bank or leasing company. Usual insurance coverage will reimburse you for the actual value of the car, say $15,000. If you have gap Insurance, the insurance company will pay that $3,000 difference!
When You Might Need Gap Insurance
If you put down only a small deposit when you purchase a new car, the amount of the loan might exceed the market value of the car itself within the first few years of car ownership. It’s a good idea to consider buying gap insurance for your new vehicle if you:
- Make small down payment or no down payment on your vehicle
- Finance your car for 60 months or more.
- Lease your vehicle.
- Buy a car that depreciates faster than the average vehicle.
Gap insurance, however, won’t cover all your out-of-pocket expenses such as:
- Overdue lease/loan payments at the time of the loss
- Financial penalties imposed under a lease for excessive use, abnormal wear and tear or high mileage
- Security deposits not refunded by a lessor
Costs for extended warranties, Credit Life insurance, Health, Accident or Disability Insurance purchased with the loan or lease; and Carry-over balances from previous loans or leases.
Where To Buy Gap Insurance
In many cases, you can simply add gap insurance to your existing auto insurance policy. If you’ve already bought your car, don’t worry: You may still be able to add gap insurance, depending on the type and model of the vehicle.
Contact one of our agents at Bearingstar today to see what qualifications are required for you to buy gap insurance and what policy will work best for you.
*Total Loss means a loss in which your insurer determines the cost to repair the covered auto to its pre-loss condition plus salvage value and the insurer’s consideration of supplemental costs, equals or exceeds the actual cash value of your covered auto. Coverage is not available for autos purchased with an equity line, charge card, or financed through an individual
- Cost of Car Ownership. Edmunds. https://tinyurl.com/2p8rspam