If your car is demolished or stolen, gap insurance covers the difference between what your auto is worth (based on current market value) and the amount you still owe on your loan or lease.
When you purchase a vehicle from a car dealership, the sales pitch often includes gap insurance. The reason is that your car loses value the moment you drive it off the lot. In fact, the minute you sign the paperwork, your vehicle goes from being a new car to being a used automobile, and its value immediately decreases.
If you were to have a wreck in that brand-new car, your insurance company may not cover the cost of what you owe on it. They would only cover the cost of replacing your vehicle with one of the same model year, age and condition. This is why you should consider buying gap insurance when you purchase or lease a new car. So what is gap insurance? Also known as guaranteed auto protection insurance, it will cover the difference between your car's depreciated value and what you actually owe on your auto loan or lease if your car is stolen or totaled.
Do I need GAP Insurance?
Gap insurance can be a good choice in any of these circumstances:
- You are purchasing or leasing a new or slightly used vehicle.
- You are buying a vehicle of significant value.
- You are financing a new or used vehicle without a large down payment, creating a "gap" between your vehicle's actual value and your loan amount.
- You do not have significant cash savings that would allow you to cover the difference between the amount you owe on your loan and the actual cash value if your car is stolen or totaled.
As with most types of insurance coverage, everything comes down to your risk. If you are buying a car, gap insurance will most likely be optional, and you get to decide. Do you want to avoid the possibility of a large financial burden if something bad happens to your car, or are you willing to take that risk?
Some auto leases include gap coverage, so be sure to ask about that if you are leasing. If the coverage is included, then you do not need to include it on your auto insurance policy.
Industry statistics show that new vehicles lose about 30% of their value in the first year after purchase, and 20% the second year. As a result, car owners can end up being upside down on their loan: The value of the automobile is less than the loan amount. This makes gap insurance a wise investment if your vehicle is damaged or stolen within that time frame. To purchase the coverage and get the most benefit, you can talk to us at Rongstad Insurance to help you decide if this coverage is worthwhile, depending on your circumstances.
How does GAP insurance work?
Gap insurance covers the gap between what your vehicle is worth and what you are actually on the hook for in regard your vehicle loan after a collision. Does gap insurance cover theft? Absolutely. However, typically there is a waiting period (30 days or so) after the claim is filed. This leaves time for your vehicle to be recovered. If that occurs, then your standard insurance coverage activates. It is important to reiterate that gap policies are typically only needed for a specific period of time. Once the market rate of your vehicle plateaus and comes in line with current market rates, a gap policy is no longer needed. However, since the decrease in vehicle value is so drastic in the beginning, gap insurance can be a worthwhile investment.
It works like this. Let's say you purchase a vehicle brand new for $35,000. The moment you drive it off the lot, the value drops. Then, it may only be worth $27,000. If you are in an accident, your auto insurance will pay the actual cash value of the vehicle, or $27,000. The policy specifies that they must fulfill the obligation of replacement at current market value. It has nothing to do with the loan value of your vehicle. You are still $7,000 short. Gap insurance would make up the difference.
The cost of gap insurance will vary depending on a number of factors, including the value of your car. Did you just buy a new luxury car or an economy model? Are you leasing a new hybrid car? It may be well worth the extra insurance expense if your car's loan amount significantly exceeds its value.
Getting the best deal on GAP insurance
It is important to keep in mind that not all auto insurance coverage is equal. So, give us a call, and we can help you decide if this coverage is right for you.