Gap Insurance: Coverage, Companies and Quotes
Getting the right car gap insurance advice is imperative when buying or leasing a car. Gap insurance stands for guaranteed asset protection. It deals with the "gap" between your car's true value and the amount you still owe the car company. Gap insurance has been around for awhile, although it is thought of as a new insurance development since the rising price of cars.
Your Car Isn't Worth What You Paid
As everyone knows, when you drive your new car off of the lot, it depreciates substantially. Even if you just signed for your $40,000 car, that car you just left with is no longer worth $40,000. This is what is knows in the automotive industry as "upside down." Upside down refers to when you owe more than the true value of your car. 1 in every 3 cars leaves the lot in this condition.
Why Do You Need Gap Insurance?
Imagine you have had your new car for a few weeks now. You have already put 500 miles on it. Then your car winds up getting stolen, or someone was drunk driving and smashed it into a tree and totaled it. In either of these instances, you owe some money to the place you bought the car from.
So, your $40,000 car is now worth $35,000 after depreciation. However, you haven't paid a dime of the principal yet and owe around $39,000. There is a $4,000 gap that you have to pay. Gap insurance provides the extra $4,000 so you would not continue to pay on a car that is worthless.
Don't Buy Gap Insurance at the Dealership
Car dealerships typically sell gap insurance when you purchase your vehicle. Dealerships want to cover themselves is what they will tell you. However, it is pretty much a scam. Car dealerships offer gap insurance because they make tons of profit from you. There are better ways to buy your gap insurance. There are 3 websites that specialize in gap insurance, Gap Insurance Online, National Gap Insurance and GapInsuranceQuotes.com. These sites offer much better rates than your car dealership. In particular, these companies offer gap insurance within a year of your car purchase and it only costs around $500 or less for coverage. Don't get duped into paying even more by buying it with your car dealership.
Gap Insurance May Not Be Necessary
When a car is bought with cash, you do not owe anybody anything. Since there is nothing owed, no gap can exist between what the insurance gives you and what you owe.
If you make a large down payment when purchasing the vehicle (for example, around 20 percent of the total value), you also may not need gap insurance. If the down payment you make covers the initial depreciation of the vehicle, there is a good chance that what you owe on your car loan will be less than what the insurance company will give you. Hence, gap insurance is not needed.
Finally, if you have a very short loan term (such as 24 months), you may not need to have gap insurance. If you have a short loan term and no gap insurance, you will be taking only a very small and short-term risk, as the gap will most likely shrink and disappear within the span of a few months to a year.
How Car Value and Gap Insurance Are Related
The actual cash values used when a vehicle is totaled are in a constant state of flux. The value of your model and trim level can vary on a weekly basis. These fluctuations are based on market conditions, availability of similar vehicles, wholesale transaction prices from auctions and the overall health of your vehicle's manufacturer. For example, when Chrysler LLC filed for bankruptcy protection in 2009, the projected cash values of Chrysler, Dodge and Jeep vehicles were lowered by between 4 and 5 percent. In this sense, your equity position can change overnight if your manufacturer cuts dealerships or is in a poor financial position.
Your payoff varies each time you make a monthly payment, and in this sense, it changes at a constant rate. Because car values can change overnight and your payoff will stay relatively constant, gap insurance is a good choice that will help you weather the ups and down of actual cash values in the event your vehicle is totaled.
Find Out if You Need Gap Insurance
Take a look at your total payments for a vehicle and then find the blue book value. If the first number is substantially higher, you may want to take out a gap insurance policy.
Other Gap Insurance Coverage
A gap insurance policy can cover more than just a collision. In some cases, these policies can also cover incidents like theft, or even natural disasters, from flooding to hurricanes. A gap insurance policy may even pay on a deductible amount from another policy.
Though gap coverage can extend to these kinds of events, there are a few things that may not be covered, including aftermarket parts or systems, security deposit amounts or unpaid lease or loan amounts that have been previously delinquent.
Is your luxury car or business truck worth more than your insurer will pay in the event of a claim? Many insurers will find ways to lower their responsibility on a basic liability claim. Gap insurance can put a stop to the hassle of negotiating with insurers after a claim has been filed. Protecting a lease helps a driver support themselves when they are driving a vehicle that costs more than they would have been able to afford on the market.
Long Term Situations
Most gaps are eventually closed by paying down a vehicle debt. The problem with this is a driver may sign on for gap insurance and forget to take it back off of the policy. Knowing when to cancel gap insurance is another tricky aspect of getting this supplemental insurance rider.
Vague and Insufficient Gap Insurance Coverage
The whole point of the gap insurance supplement is to cover the total liability in the event of a claim. Vague or misleading gap policies can lead to situations where a driver has bought all kinds of insurance products, thought he or she was covered, and just didn't do the math right. Gap insurance coverage should be meticulously researched by the customer.
General Requirements for Gap Insurance
As part of general practice for protecting their investment, lenders may require a buyer who is financing a vehicle to get collision, comprehensive and gap insurance policies, either separately or as a total package. These insurance requirements, along with the liability and other insurance that may be required by the state, can get expensive. It's worth looking at whether you will need gap insurance and other products before buying a vehicle or setting up a financing contract with a lender.
Related Questions and AnswersDoes Auto Gap Insurance Only Apply for New Cars?
Technically you can purchase auto gap insurance coverage for a used car, but it often makes no financial sense to do so. Gap insurance covers the difference between an insurance payout and the amount you owe on a car loan. A new car depreciates very quickly, and often an owner will owe more on the vehicle than it is worth. As a car ages, the depreciation levels flatten out, which means the value of the car and the loan amount are more in sync, making GAP insurance unnecessary. Many insurance companies or dealers will not write GAP insurance on used vehicles.
Category: Auto Insurance