As many drivers know, most cars, other than classic cars, begin to lose their value significantly as soon as they're driven off the lot. After spending a lot of money on purchasing a vehicle, you might understandably be concerned about what could happen if your car gets stolen or totaled within a few years. Fortunately, gap insurance is designed for just this purpose.
An independent insurance agent can help you find gap insurance in your area. They'll get you matched to the right policy with ease. First, though, here's an overview of what gap insurance is, how it works, and why you might want it.
What Is Gap Insurance?
Gap insurance can be added to a personal auto insurance policy as an option. This coverage is designed to protect you against financial losses in the event your car gets totaled, stolen, or otherwise deemed a total loss.
If you've taken out an auto loan to finance your vehicle and then your car gets stolen, gap insurance can be used to make up the difference between what you owe on your loan and your car's current value. So, if you'd taken out a $30,000 loan but your vehicle was now worth only $24,000 at the time of being stolen, your gap insurance coverage could reimburse you for the other $6,000 after you paid your deductible out of pocket.
When Gap Insurance Is Helpful
Gap insurance is designed to protect car owners against costs they'd incur due to the depreciation of their vehicle if it got deemed a total loss due to theft, being totaled in an accident, etc. Having this coverage can be beneficial for many drivers, considering that many vehicles lose up to 20% of their original value within the first year of ownership alone. In each subsequent year until about four or five years later, vehicles can lose an additional 15% of their original value.
Gap insurance can help protect vehicle owners in many different scenarios. These can include:
- When you buy or lease a new or slightly used vehicle
- When you buy a vehicle of significant value
- If you finance a new or used vehicle without a large down payment — this creates a gap between your vehicle’s actual value and your loan amount
- If you don't have significant cash savings that could cover the difference between the amount you owe on your auto loan and the actual cash value of your vehicle if it gets deemed a total loss
An independent insurance agent can help you weigh whether adding gap insurance to your auto policy is a wise choice for you.
How Does Gap Insurance Work?
Since most vehicles start to lose a significant portion of their value within the first year of purchase, gap insurance can create a buffer against possible losses in case of an incident. If you've financed your vehicle with an auto loan, it's likely you might still owe more on the loan than your car's current value if it gets totaled or stolen within the first few years. Gap insurance coverage essentially fills in the "gap" created by the difference between what you might owe on a loan and what your car is currently worth at the time it's deemed a total loss, which factors in any depreciation.
As soon as you drive your car off the sales lot, it’s already depreciated in value. In the event of a wreck, your insurance company will only pay you for the current cash value of your vehicle, which won’t be enough to pay off the remainder of your loan if it happens within a few months or even a couple of years after you buy the car.
Gap insurance essentially makes everything whole again by covering the portion left over after your standard auto policy pays out for your car’s current cash market value. After a couple of years have passed, gap insurance becomes useless. By this point, your personal auto policy covers the full amount remaining on your loan and beyond.
FAQs about Gap Insurance
Will gap insurance cover an uninsured car that gets totaled?
No, it won’t. Your car must be covered by a basic auto insurance policy for gap coverage to kick in if it gets totaled. Make sure to start with a basic auto insurance policy for any vehicle you purchase.
How much does gap insurance cover a totaled car?
If you purchase the right amount of gap insurance, it will cover the remaining value of your loan after your car is totaled and after your regular auto policy pays. Let’s say you purchase a $40,000 car, then total it a year later. Your car may only be worth $28,000 by that point, but you’ve still got $35,000 left on your loan. Gap insurance will make up that $7,000 difference not covered by your standard auto policy
How much gap insurance should I buy?
Generally, there is no specific recommended gap insurance coverage amount. You either have it to cover the difference between the actual cash value of your car and the loan amount, or you don't.
When shopping for your gap insurance policy, you’ll need to work closely with your independent insurance agent to get the right amount of coverage for you. How much coverage you need will depend on the type of car you buy, how much it’s worth, the length of your loan, whether you’ll be making a down payment, and other factors. Be sure to walk away with a policy that makes sense for you.
How much do I have to pay if my gap insurance doesn’t fully cover my totaled vehicle?
You’ll be responsible for any remaining amount on your car’s loan after your standard auto insurance policy pays for the current value and after gap insurance pays up to the limit specified in your policy. You also have to pay your deductible amount out of your own pocket before auto insurance or gap insurance reimburses you.
If you purchase enough gap insurance, however, you shouldn’t owe anything other than your deductible if your car gets totaled. That’s the point of getting gap coverage in the first place.
If gap insurance coverage doesn’t cover a totaled car with no insurance, what will?
Nothing. You must have a personal auto policy in place for gap insurance coverage to reimburse you if your car gets totaled. Without a personal auto policy, there would be no “gap” for gap coverage to fill. Also, every state has requirements for personal auto insurance, so be sure to never drive a vehicle without first getting a personal car insurance policy.
How an Independent Insurance Agent Can Help
An independent insurance agent can help you find the right kind of gap insurance for your needs. These agents work with multiple car insurance companies and have access to the best deals available in your area. And down the road, they'll be there to help you file car insurance claims or update your coverage as necessary.
Sources
https://www.progressive.com/answers/what-is-car-depreciation/
https://www.progressive.com/answers/gap-insurance/
