Auto insurance coverage is a must for every driver, but many individuals are unsure of whether extra policies like gap insurance are necessary for their circumstances. The bottom line is that gap insurance isn't for everyone. However, it can definitely come in handy in certain situations. Therefore, it's important to understand what gap insurance is and what to look for when purchasing this type of coverage.
What Is Gap Insurance?
Gap insurance is a type of auto insurance that helps cover car owners in the event of a severe accident where a car is totaled or in the event of a car theft. It provides coverage by paying the difference between what is received for a total loss or theft from the standard auto insurance policy and what is still owed on the car. Essentially, this type of auto insurance covers the “gap” between what your auto insurance pays out based on the value of the car and the total amount you still owe for that vehicle.
Consider the following example. Let's say you currently owe a total of $25,000 on your car. However, based on depreciation, your car is currently worth $20,000. If your car gets stolen or you get into an accident where it is totaled, your standard auto insurance policy will reimburse you for the $20,000 that your car is worth. However, that leaves you still owing $5,000 in car payments to the car financing company. If you had purchased gap insurance coverage, this $5,000 would be covered.
Looking At Gap Insurance Details
The most common place where gap insurance is offered to an individual is at a car dealership. Dealers will sometimes even offer to include the gap insurance payment as a part of your monthly payment on your car. If you are considering gap coverage, the best thing to do is to decline the dealer's gap insurance offer until you have a chance to research it on your own to determine the best coverage and rate. While researching gap insurance, look at the following details to decide which policy is the right one for you:
- Term: It's important to remember that gap insurance is only necessary when you owe more than your car is worth. Make sure that you do not continue paying for gap insurance past that point. If you need help, talk to your car financing company about how long you'll be “upside-down” (owing more than the car is worth) in your loan based on the payments you'll be making and the depreciation of the car. According to Bankrate.com, the average car depreciates about 30 percent in its first year.
- Deductible: The deductible on a gap insurance policy can vary depending on individual circumstances. Additionally, many gap insurance policies have a higher deductible than a primary car insurance policy. Be sure to consider whether you can afford this deductible and whether it is worth it based on how much you would owe in the event that gap insurance is needed.
- Coverage Limits: Be thorough when researching the details of a gap insurance policy so that you'll be aware of any coverage limits. While one policy may help with overdue loan payments or the cost of an extended warranty, others exclude coverage for these areas. Some policies also limit the dollar amount that they'll provide (such as 125 percent of the loan balance).
- Possible Discounts: Check with the insurance company where you have an auto insurance policy. Often, they'll offer a special rate for gap insurance as an add-on to your existing policy.
- Filing Claims: It's also helpful to see if you can get gap insurance combined with your regular auto insurance policy since this will make filing claims even easier. If your car is totaled or stolen, you'll only have to file one claim and work with one agent.
Factors To Consider
Even if you know what to look for in gap insurance, the most important detail to consider is whether you even need this type of auto insurance in the first place. The first thing to consider is whether you owe any money on a car loan. If you do, figure out if that amount exceeds the value. If it does, and the difference is large enough that it would be a financial burden for you to owe, then gap insurance is probably a good choice for you.
In addition, those who are leasing a car are encouraged to get gap insurance coverage. In fact, some dealers even require it as part of the lease contract. Be sure to look at your contract carefully since some lease contracts even protect the driver from gap charges if the car is totaled, meaning that gap insurance would be unnecessary.
One thing to remember is that you should always check your regular auto insurance policy before getting gap insurance, even if you are financing or leasing a car. In some cases, your regular auto insurance policy may provide the amount that gap insurance would offer in the event of a total loss or theft.
If you're having trouble deciding whether gap insurance is right for you, contact your auto insurance agent or your loan officer. They can help you figure out whether this insurance is necessary and where to get the best coverage. Gap insurance is relatively inexpensive in most cases, so getting it can save you a lot of money and stress if a major accident or theft should occur.