What is Gap Insurance?
Auto Insurance policies are designed to give you coverage when you need it most. They reimburse you for damages inflicted on your vehicle, and those repairs are paid for on an Actual Cash Value (ACV) basis. It sounds like a fair deal, but when considering that new cars are always priced at a premium, there is a bit of a gap in coverage. We’ll explain…
Let’s say you’ve decided to purchase a brand new SUV. It’s sleek, roomy, and everything else you expected from that new car quality. Now you’re doing your best to protect your new asset by purchasing the highest quality auto insurance available with Comprehensive and Collision coverage. You read the contract, and notice that repair costs are valued on ACV. Well, you purchased this SUV off the lot for $38,000, but that instantly depreciated to $29,000 when you drove off in it. That depreciated value is what your insurance carrier cares about when determing Actual Cash Value. Beyond that, some carriers do not even provide 100% of that ACV if your vehicle is totaled.
So, where does Gap Insurance come in? It bridges the loss in value between the original selling price of your vehicle to the remaining balance of your loan. Using our example above, Gap Insurance would provide at least $9,000 of additional coverage, assuming your insurance carrier valued your totaled vehicle at 100% of the ACV (which was $29,000). So your initial investment is safe, and you eliminate the risk of going upside-down on your auto loan.
Do I Need It?
Gap Insurance can prove especially useful for particular situations, such as:
- The new car you purchased is known for losing value very quickly, or you drive more annual miles than the typical driver. The coverage from Gap Insurance helps you hedge this depreciation by providing value in the event of a loss.
- You owe more on the vehicle’s loan than it’s current market value. If you total your vehicle, having Gap coverage will help you pay off the remaining balance so you’re not deep in the hole.
- Your loan on a vehicle is longer than three years. Obtaining Gap Insurance for long-term financing effectively increases the value of your vehicle (to you), improving your value ratio relative to your remaining loan balance.
- You are entirely dependent on your vehicle or cannot afford to replace it at the drop of a hat.
When Can I Use It?
Just like other auto insurance coverage types, Gap Insurance can only be accessed after an accident that caused damage to your car. Particularly, after you have exhausted your insurance carrier’s total payout for your vehicle. So when your SUV is totaled, you’ll receive compensation from the insurance carrier first, then the remaining compensation from your provider for Gap.
Of course, if you have paid off your loan then Gap Insurance is pointless. You closed the gap between loan balance and the ACV of your car.
How Much Does It Cost?
The cost of Gap coverage is going to vary between who your carrier is. In most cases, it will cost you 5% a year of what you pay annually in Comprehensive and Collision Insurance. Also, there are no deductibles associated with accessing your Gap payout.
Remember, if you’re financing a vehicle then Comprehensive and Collision coverage types are going to be mandatory by the lender. An easy way to estimate what you should be paying for your Gap insurance is to get a quote (we can provide quotes for you) for auto insurance with C&C coverage on a vehicle you’re thinking about purchasing. Take the number you’d be paying specifically for the Comprehensive and Collision Insurance combined, and multiply that by 5%.
Prices are going to vary greatly if you’re getting your estimates from the lender of your new car. In the next section we cover who you should be purchasing your Gap coverage from instead.
Where Do I Purchase Gap Insurance?
Gap Insurance can be purchased on the spot when you’re applying for your loan at a dealership, or after the fact at most auto insurance carriers. The bottom line is that lenders or dealerships are more likely to charge you unfair prices for the coverage. They try to sell you on the ease of getting it at the same time as your loan and will offer to roll it into your monthly payments. It’s usually not a good idea, because the annual price could be in the hundreds.
When purchasing Gap coverage from a standard insurance carrier, expect costs to be much more reasonable. With safe estimates, you’re looking at less than $100 per year. Usually it’s even cheaper than that, and good quotes might completely change your perspective on how accessible coverage is.
If you’re still unsure about whether or not you need Gap Insurance, give us a call today and speak with a Haven Insurance Services agent.
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Frequently Asked Questions
Should I purchase Gap Insurance if i’m financing a used car?
The answer to this depends upon how large the value difference is between what your insurance carrier will pay for your vehicle in the event of a total loss, and how much you still owe on the loan. If it’s a car of relatively low value, that’s not going to be a big number. That number means even less if you have a large savings account and can replace your vehicle immediately after losing it. The only way you’ll know for sure is by calculating the worth of convenience that Gap Insurance provides.
Does Gap Insurance cover depreciation from an accident that did not total my car?
Unfortunately not. Gap Insurance will only kick in after you have incurred a total loss and exhausted your primary insurance carrier’s limits.