What Is Gap Insurance? (And Why You Might Be Glad You Have It)

Let’s say you that you’re in a wreck and you total your new car that you just purchased a year ago. When you go to settle your insurance claim, the adjuster tells you that his appraisal software says the car is worth $15,000 and that’s the most he can pay you. The problem is that you still owe the bank $18,200.

Without gap insurance, you are responsible for paying the bank the remaining $3,200 you owe after the insurance settlement ($18,200 – $15,000). Painful, right?

Fortunately, there is a solution. Gap insurance provides coverage for the difference between the actual value or a car and the amount you owe on it. If you’re making payments on a car loan, you should seriously consider whether gap insurance is right for you. If you ever have to make a claim, you’ll be very happy you have it.

Why Is Gap Insurance Important?

After your house, your car may be the most expensive item you buy. However, whereas real estate property often increases in value over time, vehicles tend to depreciate rapidly, starting the second they’re taken off the lot. Unless you’re planning to sell your new car soon, you might not think it matters. However, if your car is totaled or stolen, the depreciation can become a problem.

Collision and comprehensive insurance typically covers the actual value of the car. Due to depreciation, this may be significantly less than the amount you paid for the car. In fact, you may owe more on the car than it is currently worth.

This is why gap insurance is important. It covers the difference between the actual value of the car and the amount you owe, so you don’t have to make payments on a car you don’t have anymore.

Is Gap Insurance Required?

Gap insurance is not required under state law. Drivers are generally required to carry liability insurance coverage. In some states, they may also be required to carry Personal Injury Protection (PIP) coverage. However, other insurance types, including gap insurance, are not typically required.

If you use a car loan to finance your car, your lender will likely require additional insurance coverage. This typically includes comprehensive and collision insurance coverage. Gap insurance may not be required, but it may be recommended.

Gap insurance isn’t just for car buyers. It’s also important for people who lease their vehicle. If you lease your car, your lease agreement may require gap insurance.

However, even when gap insurance is not required, it can still be a very good idea.

Should You Get Gap Insurance?

To determine whether you need gap insurance, ask yourself one question: Will you owe more money on your car than it is worth?  

For example, if you paid for your car with cash, you don’t need gap insurance. Likewise, if you bought your car with a car loan but have since paid all (or almost all) of the loan off, you don’t need gap insurance.

However, if you purchased a new car with a car loan, you may want gap insurance. This is especially true if you put little or no money down or if you have a long repayment period, as both of these factors mean that the amount you owe in the beginning of your loan can be greater than the value of the car.

Most new cars lose about 20 percent of their value in the first year, according to Kelley Blue Book, and some lose more. If you haven’t paid off at least 20 percent of the car’s value in the first year, you probably owe more than it’s worth. In this case, gap insurance may be a good investment.

As you near the end of your car loan, the amount you owe will become less than the value of the car. When this happens, you no longer need gap insurance.

You might not be happy to learn that you need yet another type of car insurance coverage. The good news is that gap insurance can be very affordable. Find out if it’s right for you by requesting an auto insurance quote with gap insurance.

Sources
  • https://www.kbb.com/what-is/car-depreciation/

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