What's Gap Insurance?
With so many options and requirements under the law, it’s no wonder that some people feel confused and overwhelmed when it comes to automobile insurance. Take gap insurance as a prime example. While this term is commonly heard, a lot of individuals have no idea what it is or when it’s necessary. The information provided will help unravel the mystery.
Unlike some policies that a person needs to operate a motor vehicle, gap insurance is optional. Also referred to as an “add-on” policy, it covers the amount of money that someone owes to a lender on an automobile that’s totaled during an accident and the vehicle’s actual cash value or ACV. Keep in mind, the ACV isn’t what the individual originally paid for the automobile. Instead, it’s the vehicle’s monetary value at the time the crash occurred.
Say you’re a no-fault driver involved in an accident. Unfortunately, you end up totaling your vehicle. After an inspection, you find out the cost of repairs would exceed what it would take to replace it with another automobile. For instance, if you still owe $12,000 to the lender, but the ACV is only $9,000, there’s a $3,000 gap between the two, minus the deductible. With gap insurance, you have protection for that $3,000 difference.
When collecting on gap insurance, rather than the money going to you, it would go directly to the lender. For optimal protection against a totaled car scenario, it’s best to have full or replacement coverage. With that, you would have no problem buying another vehicle. More than likely, you can purchase gap insurance from the same company where you get your other coverage.
When in an accident, your insurance provider would have an inspector determine the condition of your vehicle. To say it’s totaled, he would focus on several things. These include the age of your automobile, its mileage, condition, the ACV and the resale value. In fact, most inspectors also consider the selling price of vehicles similar to yours within the same geographical area.
What Gap Insurance Does and Doesn’t Cover
One of the benefits of taking out gap insurance is its incredible versatility even though it only covers vehicle damage, not bodily or property damage associated with the accident. Following are some of the things this type of insurance covers:
Theft - if someone steals your automobile and the police aren’t able to recover it, gap insurance would likely provide protection
Negative equity - this would be the $3,000 difference between what you owe the lender and the vehicle’s actual value as indicated in the scenario
Deductible - the policy wouldn’t cover the amount of your deductible. Whether that’s $500, $1,000, or higher, you would be responsible for that particular expense
Engine failure - remember, gap insurance provides you with protection only in the event of totaling your vehicle in an accident, meaning it doesn’t cover any type of mechanical repairs
Death - while gap insurance will pay for the difference in the loss of a vehicle, it won’t cover bodily injuries, lost wages, medical bills or funeral expenses
The Best Time to Buy Gap Insurance
Often, insurers require the owner of a new vehicle to buy a gap insurance policy before driving off the lot. After proving they’ve purchased full coverage, the gap policy cancels. This applies whether you have an original loan or lease on a new automobile.
Also, some insurance companies require this type of coverage on vehicles no more than two or three years old. Since the requirements vary, it’s important to talk to your agent to ensure you have the appropriate type of protection.
In most cases, an individual would choose gap insurance before or at the time of buying a new vehicle. However, there are instances when they can opt for this coverage after making the purchase. It all depends on the exact model and year. If you want this type of protection, you can probably get a policy while at the dealership. Although most dealers offer affordable coverage, it’s usually cheaper by going through an actual insurance company.
One important note - several of the more prominent insurance providers include gap coverage as part of the client’s overall policy. When shopping around for coverage, find out if gap insurance is or isn’t included.
A Good Choice?
As to whether gap insurance is a good choice, it comes down to several factors. Most importantly, you need to look at the amount of money owed to the lender compared to the ACV of your vehicle.
Remember, all cars, trucks, SUVs, and minivans depreciate almost immediately after driving off the lot or very soon after. If there’s enough of a difference that makes you feel uncomfortable or totaling your vehicle in an accident would put you in a financial bind, then gap insurance is well worth buying
While hard to think about, it’s not far-fetched for someone to pay $30,000 on a new automobile only for its ACV to drop to $23,000 shortly after the purchase. In deciding whether you want gap insurance coverage, you might consider how quickly the specific type of vehicle you buy typically depreciates. If it’s a model that tends to hold its value, you may not need this coverage. Otherwise, buying an add-on policy would be a wise choice.
As a rule of thumb, you should seriously consider gap insurance in the following scenarios:
Down payment - buying a new automobile with less than 20% down payment
Loan terms - having terms of a loan that extend beyond 60-months
Distance - driving more than the average 15,000/year
Personal situation - example: owning just one vehicle and unable to purchase a new one in the event of totaling it in an accident
Leasing - leasing a new automobile (the dealership may require this type of coverage when leasing)
Rolled loan - rolling the balance of a vehicle loan into another loan when buying a new automobile
The Bottom Line
While a lot of people don’t need gap insurance, many do. Look at the scenarios in which this type of coverage makes sense and talk to your insurance agent. Considering how affordable it is to buy a policy, having gap insurance would eliminate certain risks.