Most people are not familiar with gap insurance and why it is so important to have. You should consider purchasing gap insurance if you owe money on your vehicle so that in the event of an accident or theft, you will not have to continue paying on a vehicle you no longer have.
What is gap insurance?
Most people finance their new cars rather than paying cash for them. Gap insurance is a product offered by car dealers to ensure the vehicle is paid off in the event of theft or an accident resulting in a total loss (meaning the vehicle is not worth repairing). Gap insurance protects you from the obligation of continuing to make payments when the vehicle is no longer in your possession, leaving you free to purchase another car without having to pay off your previous car loan.
The value of a car quickly depreciates, beginning right when you drive the new car away from the dealership. Even if you make a large down payment, chances are that if you're in a serious accident or if your car is stolen, your insurance will not be sufficient to cover the balance owed on your car loan. You are responsible to cover any deficiency not covered by your insurance company. This is reason people purchase gap insurance, which covers the balance of the loan remaining after your insurance claim is processed.
You may think your down payment is sufficient to leave your loan balance at an amount less than the book value of your vehicle, but that depends on many different factors such as the length of your loan and how well the make and model of your car retains its value. Unlike your home, your vehicle will lose value over time no matter how well it is maintained. This means there is a good chance that you will owe a balance on the loan after your insurance claim has been processed unless you pay additional premiums for replacement cost or carry gap insurance.
Is Gap Insurance Worth the Cost?
Maybe you have been very lucky or you're an excellent driver who has never had an accident or your car has never been stolen. If this is the case, you've probably never considered purchasing gap insurance. Anything can happen that is beyond your control. Your car can be totaled if it is hit while sitting in a parking lot. If it happens to be in the wrong place at the wrong time, it can be stolen.
The cost of gap insurance is minimal when you consider the possibility of a total loss when you owe more than the book value of the vehicle. Once you have purchased your new car, there is no adding the gap insurance at a later time. Some dealers may allow a grace period or a certain time frame where the option of purchasing gap insurance is available, but it is easier to do before your contract is submitted to the bank.
How Gap Insurance Works:
When you purchase your new car, the salesperson should offer you gap insurance. If you experience an accident or theft, resulting in a total loss, the financial institution will handle the gap insurance claim as long as they have been notified that you carry the additional coverage. They will submit a claim to your gap insurance agent for the balance owed on the vehicle as soon as your auto insurance claim is paid.
Gap insurance does not provide cash to you to buy a new car, but it does pay off the vehicle you no longer have possession of. You will still need to purchase a new car, but at least you will not be obligated to pay off the loan on the vehicle you no longer drive.
How to get Gap Insurance:
Gap insurance is not generally purchased from your automobile insurance agent. In most cases, it is offered to you by the dealer when you purchase your vehicle. The amount of gap insurance you can purchase depends on the financial institution that finances the vehicle. It is generally added to your loan. Some dealers give you up to 30 days to purchase gap insurance if you should elect not to, and then change your mind after purchasing a new car.
When you buy your vehicle, the cost of gap insurance is based on the length of time you need it to cover the loan balance. The insurance is only for the time that you owe on a vehicle. If you pay off the car early, the lender may refund any unused portion of your premium.
If you should pay off your loan as agreed and do not need the gap insurance, the premium in not refundable. The policy expires when the loan is paid in full or if you should default on your payments and the car is repossessed.
Replacement Cost Insurance:
Some people choose to carry insurance with replacement cost. Be sure to check the price on this option as it is usually significantly more than the cost of gap insurance. Gap insurance is a short-term policy that benefits the lender only. Gap insurance pays only the amount due the lender after your auto insurance claim has been processed.
With replacement cost, you receive the replacement cost of a new vehicle less the amount due on your loan. The advantage is you will likely have money for a down payment on another vehicle, but the cost is higher than gap insurance and not all insurance companies offer this option.
In summary, gap insurance is essential if you are financing a new car. By purchasing gap insurance you protect yourself from having to make two car payments in the event of a total loss; one payment for the lost vehicle and one for the replacement vehicle you must purchase. You will generally have 30 days to change your mind if you do not purchase the coverage when you purchase the vehicle; however, some dealers do not offer this option. It is better to have the coverage and not need it than to need it and not have it, so be sure to make the right decision about gap insurance when you finance a new vehicle.
This article was written by Ted Lewicki, a Farmers Insurance Agent who represents several insurance companies. Ted has been in the insurance business for nearly 50 years; he has been a member of the Better Business Bureau with no reported complaints. He is always available when his customers have questions or concerns or they need to review their insurance coverage. http://www.a-oneinsurance.com/ services Oakland County, Michigan with many clients in Waterford, Pontiac, Rochester, Auburn Hills, West Bloomfield, Keego Harbor, Milford, White Lake, Walled Lake, Wixom and neighboring cities and communities.