If you bought a new car, it started to depreciate as soon as you drove it off the lot, about 10 percent of its original value in a year’s time. And that’s just an approximate estimate; some can depreciate as much as 50 percent if it’s not a very popular car.
If your new car is totaled in an accident or seriously damaged, your standard insurance will pay current value at the time of the claim. This can be a problem, and in some circumstances the loan you took out to buy the car can exceed the actual market value of the car or truck.
Your standard car insurance policy will only pay what your car is currently worth and if you still owe more than that current value amount this can be a problem. Your finance company will want you to pay your total loan off immediately.
This is where gap insurance comes in handy. Gap insurance covers the difference between the vehicle’s current value and the amount you still owe on it.
Should You Get Gap Insurance?
Gap insurance is most needed in particular circumstances. The Insurance Information Institute (III) recommends gap insurance when:
- The loan is financed for 60 months or more
- The down payment was less than 20 percent
- The car is leased
- It’s a faster-depreciating vehicle
- The new loan includes rolled over negative equity from a previous car loan
How to Purchase Gap Insurance
Gap insurance is optional and separate from your standard policy. States differ in gap insurance rules. Some states require you get it, and loan financers often do too. Car dealers are sometimes required to offer gap insurance.
If you purchase gap insurance through a car dealer you’ll likely pay more than if you buy it from your insurer at the same time you purchase your main policy. Usually, adding gap insurance on top of collision and comprehensive coverage only costs about $20 more per year (III).
Check out the auto insurance options offered on einsurance.com, where you can also compare quotes. Be sure to ask about gap insurance if you believe it’s a good way to go for you.