Can Gap Insurance Close the Gap to Keep You on the Road?

 By Catherine Powell

Image courtesy Pixabay

If you're in the market for a new car that you plan on financing, you'd be well advised to touch base with your insurance agent before you sign on the dotted line.  That's because you may want to look into adding gap insurance onto your existing auto  policy before you drive any new car off the lot.  Whether you realize it or not, the moment you drive a new vehicle away from the showroom it depreciates significantly. Should your shiny new ride get totaled in an accident, catch fire, or get stolen in the first couple years of ownership, you may be in for a rude awakening when it comes to the check your insurance agency will issue for a total loss.  Instead of providing you with the amount to buy a new car of the same make or model, you'll wind up receiving the current value of the vehicle minus depreciation and your deductible.  

How much depreciation does a new car experience?

• As soon as you drive it off the lot it loses an average of 10% of its value.
• In the first year, many makes and models lose around 20% of their value.
• After two years, most makes and models lose up to 31% of their value.
• Three years reduces a vehicle's value to 58% of its value.

Those are average figures.  Depending on the mileage, wear & tear, the assessed value of your vehicle could be even less than the figures I just quoted.  However, even if your vehicle is in mint condition with low miles, if your ride is totaled during the first few years, the amount you'll be offered by your insurer won't be sufficient to pay off the amount you owe on your car loan if you have standard auto insurance.  That means you'll have to pay what you owe to the lender before you can start shopping around for a replacement vehicle. Ouch!

Let's crunch some numbers.  If you finance a new car that costs $30,000 over 6-years at 5%, you'll owe the lender $34,786.65 to satisfy the loan.  What would happen if your vehicle is totaled or stolen in the first week that you owned it was that your insurer would pay out approximately $27,000, leaving you owing $7,786.65 minus any initial payment you made on the loan, plus your deductible.  If you had gap insurance, this would help cover what you owed the lender.  

Image courtesy Pixabay

Do you like to trade-in your car every few years?

Gap insurance can also help cover the difference in what you owe and what your vehicle is worth if you're considering trading it in on a newer vehicle in the first few years of ownership.  That means if your 3-year-old car is worth $20,000, but you owe the lender $25,000, some gap insurance policies will help you cover all or a portion of the differential, which will allow you to make the trade without losing your shirt in the process.  

What doesn't gap insurance cover?

1. Down payments
2. Overdue loan or lease payments
3. Costs for extended warranties
4. Roll-over amounts from previous loans or leases
5. Penalties for excessive mileage on a leased vehicle
6. Security deposits
7. Aftermarket equipment added to the vehicle by the owner
8. Mechanical issues not covered under warranty
9. Damage caused to property of a third-party
10. Medical expenses 

Do you already have gap insurance?

1. If you lease a car, the leasing company may automatically include gap insurance in the price of the lease. Check the leasing agreement to determine if this is the case.
2. If you finance your vehicle, your lender may require you to have gap insurance along with collision and comprehensive coverage.  A quick call or text to your insurance agent can help you determine if gap insurance is included in your current coverage.

How do you acquire gap insurance if you don't already have it?

1. Your vehicle needs to be no more than 2-3 years old.
2. You may add gap insurance at the dealer when you purchase a new car, although this is usually more expensive than adding it to your existing policy.
3. You can add gap coverage to your existing auto policy by contacting your agent.

How much does gap insurance cost?

1. Dealers typically charge $500-$700 for three years of gap coverage.
2. Insurance companies usually charge $20-$40/year for gap coverage.  

Are there alternatives to gap insurance?

1. New-car replacement coverage pays for a new car of the same make and model you currently own, minus the deductible.  
2. Better-car replacement coverage won't give you what you need to buy a new model of the same car you currently drive, but it will give you enough to buy a newer model with less mileage than a standard auto policy without gap coverage.

Which type of coverage is best for you?

    If you purchase a new car, you owe it to yourself to compare the cost and coverage that will best fit your        needs and budget.  This way if your vehicle is totaled in the first few years of ownership, you'll have the        financial wherewithal to replace your ride without breaking the bank.

Catherine Powell is the owner of A Plus All Florida, Insurance in Orange Park, Florida.  To find out more about saving money on all your insurance needs, check out her website at http://aplusallfloridainsuranceinc.com/