What is Gap auto insurance coverage? Worth it?

A new car could be the worst investment in the world. Why? A new car loses 15% to 20% of its value the minute you drive it off the dealership! But this phenomenon is not limited to new cars: used cars also quickly lose their value.

If you are financing your car, it is unlikely that the value of your car will equal or exceed the amount of the financing over the life of the loan. The bottom line is that most people owe much more than their car is worth, new or used (i.e. reverse car loan), and that can have extremely costly repercussions in the event of a car accident. Gap insurance could be the solution to avoid such a disaster.

What is gap insurance?

Gap insurance covers the “gap” between what your insurance company will pay and the amount of money you owe on your car loan in the event of a total loss. When you buy a car, the retail price you pay is more than the resale value of the vehicle. On top of that, if you financed your car, you’ve likely built extra costs into your loan that you can’t get back, including sales taxes, title fees, emission fees, and registration.

Depending on how much down payment you put down on your car, your car loan may be immediate upside down the moment you pull out of the lot. That position can be greatly aggravated in the event your car is totaled, in which case you’ll get less money from your insurance company than you still owe on your car loan.

Do you need gap insurance?

Of course, not everyone needs gap insurance. But there are a few key cases where gap insurance can play a crucial role in your financial well-being:

  • If you finance a car with a high depreciation rate, you may benefit from purchasing gap insurance. Most vehicles depreciate quickly, but some cars depreciate very quickly. quickly.
  • If you have financed your vehicle for more than 4 years, gap insurance may offer additional protection in the event of a total loss. A shorter financing period improves your loan-to-value ratio. In other words, the “gap” between what you owe on your car and its value will narrow and disappear much sooner with a short-term loan than with a longer-term loan.
  • If your down payment was less than 20%, you may owe more than your car is worth. If your car is totally stolen or stolen, gap insurance can help you pay off the loan balance.
  • If you transferred a loan balance from another car to the loan, gap insurance may be beneficial in the event of a total loss.
  • You may need to purchase gap insurance if you are renting a vehicle.
  • If you drive more than the average 15,000 miles a year, you may benefit from purchasing gap insurance. High mileage cars depreciate faster than other cars.
  • If your family has only one car, you probably can’t afford to be without a car for any length of time. Gap insurance coverage helps compensate your family in the event of a total loss.

Essentially, you don’t need gap insurance if you’re confident that your loan-to-value amount won’t leave you with an upside-down auto loan in the event of a total loss.

How much does gap insurance cost?

The typical gap insurance rate is about 5% of the portion of your annual insurance premium related to comprehensive and collision coverage. These rates can vary widely depending on the value of the car, the location, and the history of the driver.

For example, if you pay a $600 annual premium for comprehensive and collision insurance, your gap insurance will likely be around $30 a year.

How to get gap insurance

Buy from an agency, not a dealer

You can purchase gap insurance from the car dealer, your finance company, or an independent insurance agent. However, it is generally best to avoid purchasing this insurance from the dealer where you purchased your car. Gap insurance rates quoted at dealerships can be up to 4 times the amount of typical rates.

Instead, request a gap insurance quote from your insurance agent or an independent insurance company. You’ll want to purchase gap insurance right after you get a car loan. However, delaying the purchase until you can drive to your insurance agent’s office could save you hundreds of dollars.

Make sure you get a refund

Gap insurance coverage only applies for the duration of your loan. Once you pay off your loan, you no longer need this particular coverage.

Also, the gap insurance premium is usually paid up front or financed from the loan. For example, if your gap insurance premium is $10 a month and you financed your vehicle loan for 72 months, you may need to pay the full $720 at the time of purchase or transfer it to your vehicle balance. loan.

But remember, if you sell or refinance the car before your loan term is up, you should get a refund. Even though you paid the gap insurance premium in advance, the amount is prorated over the life of the loan.

If your policy was set at $720 for 72 months and you decide to pay off, sell, or refinance the car three years later, you should receive a $360 refund from your insurance provider. This reimbursement should be disbursed automatically as soon as the insurance provider is notified of the sale or refinance. However, in some cases, dealers take their time in issuing the refund or will not do so without a reminder from the customer.

If you refinance your vehicle, remember to purchase gap insurance on your new policy to make sure you still have coverage for your car.

When not to buy gap insurance

While gap insurance can play an important role for many car owners, there are still plenty of situations where purchasing this insurance is likely to be a waste of money.

Here are the most common scenarios where you can waive gap insurance:

  • If your car is worth much more than the loan and you know your insurance company’s total loss payment will exceed the loan amount, you don’t need to buy gap insurance.
  • If in the event of a total loss, you have the ability to continue making loan payments or pay off the loan, you do not need gap insurance.
  • If in the event of a total loss, you don’t need to replace your vehicle, you don’t need gap insurance.
  • If your loan is for a relatively short period of time, say 6 to 12 months, you do not need to purchase gap insurance.

Last conclusions

Owning a car can be expensive. After seeing their principal and interest payment, many people balk at the idea of ​​paying another $15 a month on top of their usual comprehensive and collision coverage.

However, in most cases, gap insurance is a “must-have” expense if you buy a car on credit. If you don’t, you risk paying an expensive car loan for a vehicle you can’t drive.