With rising costs everywhere you look, most of us are looking for places to cut expenses. Finance experts are counseling consumers to cancel any unnecessary insurance coverage, and that’s generally wise advice…but it shouldn’t apply to the gap insurance on your vehicle. A gap policy doesn’t cost much—a standalone policy usually will cost about $200 per year…potentially more if you buy it from a dealership and potentially much less if you bundle it with an existing auto insurance policy. But it could save you from financial disaster if you end up needing it. Here’s what to know, from insurance expert Shannon Martin.
Gap insurance is an extra type of coverage that can bridge the gap between the actual cash value of your vehicle in a total loss and what’s left on your bank loan.
Example: You buy a car for $50,000 with $5,000 down, financing the remaining $45,000. By the next year, the car’s value has depreciated to $35,000 and your loan balance is $40,000. If you get into an accident and your insurer “totals” the vehicle, your insurer pays the remaining $35,000 of your debt to the bank. But that leaves a $5,000 gap. If you had purchased gap insurance, the entire $40,000 loan balance would be covered. Without gap insurance, you’ll have to pay the $5,000 yourself, most likely in ongoing monthly installments, or roll it over into your next auto loan.
Gap insurance coverage used to be recommended primarily to purchasers of high-end vehicles with high depreciation rates. But today, skyrocketing costs of parts and labor mean that an accident with damage that would have been cost-effective to repair just a few years ago is more likely to amount to a total loss.
Purchase gap insurance if you’re buying a new car…the make and model depreciates quickly…you have a long loan term…and/or you’re putting up a small down payment. Some leasing companies require gap insurance.
Gap insurance also is available for used cars. New cars depreciate faster, but drivers who purchase used cars with little or no downpayment could find themselves in the same boat. Most carriers require the car to be three years old or newer, and there can be a mileage limitation. Also, only one prior owner typically is allowed.
Use a car-deprecation calculator to get an idea of how a vehicle’s value will change over time. You can find one at CarEdge.com/depreciation. Progressive and Nationwide also have online calculators.
Some new-car dealers automatically put gap insurance on your vehicle. Not only is such a policy likely overpriced, but its cost gets added onto your loan amount so you end up paying interest on it. That is spelled out in your contract’s fine print, but many dealers won’t mention it to you.
To avoid this scenario: Research the depreciation rate of the vehicle you’re looking to buy, and shop around for a gap insurance policy among the major insurance carriers. After choosing the best policy, purchase the vehicle and tell the dealer you’ve got your own gap insurance.
At a certain point, the lines representing how much you owe and how much the vehicle is worth will cross. In other words, the “gap” will disappear. Insurers don’t automatically cancel gap policies when this point is reached, so it’s up to you to keep track of when you no longer need the policy…and that will be easier to do if you’ve purchased through an insurance carrier rather than through the dealership.
