Is Gap Insurance Worth the Price?

By Catherine Powell

Image courtesy flickr

There’s nothing more exciting than driving a new car off the dealership lot.  The look, feel and new car smell is intoxicating to most drivers.  Especially if they took weeks or months to decide which model to buy before wheeling and dealing with the sales manager.  Hopefully your new pride and joy will give you and your family years of driving pleasure.  Unfortunately, that joy can come to a screeching halt faster than new ABS brakes if your car should be stolen or destroyed in an auto accident during the first couple of years you drive it.  What most owners don’t realize is that as soon as their car drives off the lot, it depreciates significantly.  So much so that their auto insurance may or may not be able to replace that new car with one of equal value should worse come to worse. 

What’s the point of having Gap Insurance?

If you read the fine print in your auto policy policy, you’ll quickly find out that it agrees to pay the cash value of your car should it be a total loss.  While you may have plunked down $25,000 for that new Honda Accord, the minute it hits the street, its cash value drops several thousand dollars.  That means if your car is totaled in a crash, you’ll be required to make up the difference out of your own pocket plus your deductible.  Many people who’ve had their new car wrecked or stolen in the first year or so are understandably upset when they come to find that their insurer isn’t going to give them enough to buy the same car, or even pay off their car loan.  That’s because most drivers don’t understand how depreciation works.

Image courtesy pixnio

While modern motorists are accustomed to such high-tech things as GPS navigation, satellite radio and hands-free calling and texting, what many are shocked to learn is that depreciation was invented long before cars and trucks took to the road.  It all started with the railroads.  When the iron horses first appeared in the US, railroad tycoons were saddled with not only the cost of locomotives and railroad cars, but also the high cost of laying tracks.  In order to keep their investors happy, railroads took to calculating how long railroad hardware would likely last, then via creative accounting they assigned a yearly value for tracks and rolling stock that made their enterprises seem much more profitable than if they’d deducted the entire amount all at once.  It wasn’t long before other industries embraced the concept of depreciation to make their profits seem more robust.

When it comes to cars, owners pay much more than a car is worth.  Not only do they have to pay for the cost of raw materials and fabrication, but they also kick in for such things as dealership operating costs and advertising.  This means you actually lose money on the deal the moment you sign the papers and take possession of the car keys.  When insurance agencies calculate the cash value of a vehicle, they don’t base it on its retail value, but rather its resale value.  While this varies depending on the year, miles, options and condition, suffice it to say that should the vehicle be stolen or totaled in the first few months, don’t expect your insurer to hand you a check that will allow you to purchase a brand new car of the same make and model.  Insurance companies would lose their shirts if they did that.

While you can do things to make sure that your insurer pays more when they assess the value of your vehicle, like driving fewer miles, maintaining your vehicle at regular intervals and making sure that it stays at or near showroom condition, you’re still going to get less for your vehicle than you think it’s worth if it disappears or is hauled to the scrapyard after an accident.

What can cause an insurer to declare your vehicle a total loss?

Image courtesy pikrepo

Many people feel upset when their insurance company declares their car a total loss after an accident, especially when it appears that the car could easily be repaired.  Again, the insurance companies aren’t making an arbitrary decision.  They need to value the cost of the repair versus the cash value of the car.  That’s the bad news.  The good news is that if your vehicle is totaled, you should receive the cash value of the car as it would have been calculated by an appraiser before the wreck, minus the deductible.   The bad news is if the car is practically brand new, this usually won’t allow you to purchase a new car of the same make and model if you have standard coverage.  However, there is an option that could make up the difference that’s called Gap Coverage.

Close the gap to drive away with a new car.

The GAP in gap insurance means Guaranteed Asset Protection.  In short, what it does is guarantee that you, your lender or leaseholder is protected from taking a financial loss if your vehicle is totaled.  From a leaseholder (if you lease a vehicle) or a lienholder’s (if you have yet to pay off your car loan) perspective, requiring you to carry gap insurance means they won’t wind up holding the bag if the vehicle is stolen or totaled before you finish paying for it.  For an owner, it means they won’t be hit with a bill if the car is a total loss.  In essence, everybody wins.

That’s right.  If you total your car and still owe more than it is worth, which is common in the first couple of years, your insurance check won’t go to you.  It will go straight to the bank that holds the title to your vehicle.  Plus, you may still owe the lender the difference between the amount your insurer gave the bank and the amount you owe the bank.  What this boils down to is you no longer have the car, but you’re still obligated to keep paying for it until you satisfy the loan.  Ouch!  What’s even worse is with an outstanding auto loan, it could prove difficult to secure another car loan since you still owe money on the totaled car.  This is what’s known as being caught between a rock and a hard place.

The bottom line is if you put down less than 20% of the vehicle’s purchase price, adding gap insurance is well worth it.  Also, if you have a 60-month loan, you’ll sleep better at night knowing that if something unfortunate should happen to your vehicle, you won’t be left holding the bag.  Once the cash value of your vehicle falls below the amount you owe the bank, you can forego gap insurance.

When you consider the high prices of vehicles these days, an insurance supplement that costs around $20 per year isn’t at all expensive.  Designed to work with the collision and comprehensive portions of your auto insurance policy, this is one add-on that not only provides peace of mind, it could make sure the next set of wheels you own doesn’t come with a bell instead of a horn.

Catherine Powell is the owner of A Plus All Florida, Insurance in Orange Park, Florida.  To find out more ways to save on flood insurance, check out her website at http://aplusallfloridainsuranceinc.com/