What exactly is gap insurance? Do you need it? If you're in an accident and your car is totaled, your insurance company will replace your vehicle, right? Not necessarily.
This is an important question you should ask yourself. Do you know the exact coverage you have? Gap insurance is especially important in these instances:
1. You paid a minimal or zero down payment.
2. You have financing terms longer than 60 months.
3. You rolled negative equity into a new car purchase.
4. You leased a vehicle.
Remember, the minute you purchase your new vehicle it begins to depreciate when you drive it off the lot. The average depreciation on a new vehicle is 20% in the first year of ownership.
Everyone has experienced purchasing a brand new vehicle and the excitement you had driving it. Let's say you buy a really great off-road pick up truck. You put lights on it, new shocks, and upgrade a few things to make it even better for your planned adventures. Now you have an even larger amount of money invested in your truck. Out of the blue you get a transfer order. The transfer comes in and it's time to move the family and continue your military career in a new location. The company assigned to your PCS move transported your almost brand new truck across the country and there is an accident. Unfortunately, your truck was destroyed.
If, when you financed the purchase of that truck you put down only a small deposit in the early years of the vehicle's ownership, the amount of the loan may exceed the market value of the vehicle itself. This is going to leave you with a balance owed for your totaled truck. Not to mention all those accessories, rims, tires, lights and exhaust you bought are not considered a part of the actual cash value of the vehicle.
Most vehicle insurance policies only cover the ACV of the vehicle. ACV is the cost of the car when it was new, minus age of the vehicle, mileage, physical condition and many other factors when covering your vehicle. You could end up owing thousands on a truck you can no longer drive. This is where gap insurance comes in.
Gap insurance is an additional coverage that can be added to your auto insurance. Gap insurance can cover the balance of a loan or lease if your vehicle is destroyed, stolen or a total loss. That means if your auto insurer only covers 50 thousand based on actual cash value, and you still have a 60 thousand dollar balance, you would be responsible for the difference owed.
Gap insurance will not include unpaid finance charges, excess mileage or any other charges or expenses associated with the loan or lease. Gap insurance is important in the first few years of new car ownership. This is typically when the value of the vehicle is worth less than what is owed on the loan. Eventually as you get closer to the end of your financing term, gap insurance becomes less important because the amount owed on the loan has caught up to what the vehicle is worth. Gap insurance can be removed from your policy at any time. Some lease terms may require gap insurance. Each will have specific details regarding required coverage.
Most car dealerships will offer gap insurance for your new vehicle at an increased cost. Insurance companies also offer gap insurance as part of your policy and will charge significantly less than dealers. With many auto insurers offering gap insurance along with your collision and comprehensive coverage might only boost your premium by a few dollars a month. Fortunately, most insurance companies today are extremely competitive and give bundling discounts. USAA offers this as part of their coverage for new vehicles for military service members and their families.
Gap insurance does not replace collision and comprehensive coverage. Collison and comprehensive coverage is required by law in most states when financing or leasing a vehicle. Gap insurance is an additional piece of coverage.
You don't need gap insurance when cash is paid, or when more than 50% of the car's balance is paid as a down payment in most situations regardless of terms.
For a couple bucks a month in the beginning of your loan you can have peace of mind knowing if your vehicle is destroyed, stolen or a total loss gap insurance can prevent you from owing a balance on an inoperable vehicle. Compare rates on gap insurance now.
