What Is Gap Insurance?
If you’re in the market to purchase a new
vehicle you may feel inclined to gloss over gap insurance, thinking it’s just another expense
on an already costly purchase. It also might not seem as straightforward as
other kinds of coverages, such as comprehensive and collision. If you’re buying a new vehicle, it’s a good
idea to learn about the perks of gap insurance beforehand to decide whether or
not it’s right for you. We’ve got the answers to your gap insurance questions
here!
So,
What Is Gap Insurance?
Gap insurance is an optional insurance coverage offered by a dealership or financial
institution to individuals who are purchasing a new vehicle. In the event your
vehicle is totaled or stolen, gap insurance provides coverage to bridge the
“gap” between the actual cash value of your vehicle and the remaining balance
of your lease or loan.
How Is
Gap Insurance Useful?
Let’s say you purchase a new vehicle for
$20,000. If that vehicle depreciated in value 20 percent, its cash value would
be $16,000. If your vehicle was totaled and you still owed $18,000, you would
have to pay the $2,000 difference out of pocket. That’s where gap insurance
would come in: if you have gap insurance, the $2,000 difference between your
auto loan’s balance and your vehicle’s cash value would be covered.
Another thing to consider is the current
market value for vehicles. If you purchase a vehicle at a time when market
values are high, you may find yourself in a position where you wished you had
purchased gap insurance if the market value drops and you get in an accident. The gap between what you paid when
you purchased your vehicle and what it is worth in the future could be
significant.
Is Gap
Insurance Necessary for Me?
So, should you get gap insurance?
The Insurance Information Institute advises that
you should consider buying gap insurance if you:
• Made
a down payment of less than 20 percent
• Are
financing for 60 months or more
• Are
leasing a vehicle
• Purchase
a vehicle that depreciates quickly
The bottom line is, if you are worried the
actual cash value of your vehicle could be less than what you owe on your loan,
and you want to avoid a situation in which you may have to pay the difference
out of pocket, you can give yourself the peace of mind by purchasing gap
insurance.
Do you need a refresher on the different kinds
of insurance coverages and which ones you need to have? Check out our blog on
insurance coverages for beginners!
