GAP Insurance Explained: What is it and do you need it? [2 min read]
Most people have heard that a new vehicle starts to lose value the moment it leaves the car lot. It’s true that new vehicles lose value or depreciate; a good rule of thumb is that most lose approximately 15-20% within the first year of ownership. But have you ever wondered what this actually means for you, the owner? Sure, you get to enjoy that new car smell for a few months, but what if your shiny new ride gets totaled or stolen during that time? Standard auto insurance only pays the depreciated value, or the “current market value” of the vehicle…so, what if that is LESS than what you owe on it?
What is GAP insurance?
SIMPLY PUT, GAP INSURANCE COVERS THE “GAP” BETWEEN WHAT YOUR AUTO INSURANCE WILL PAY (THE DEPRECIATED VALUE) AND WHAT YOU OWE. IN OTHER WORDS, GAP INSURANCE PROTECTS YOU FROM HAVING TO COME OUT OF POCKET WHEN YOU ARE “UPSIDE-DOWN”— MEANING YOU OWE MORE THAN THE VEHICLE’S CURRENT VALUE. THE SIMPLE GRAPHIC BELOW ILLUSTRATES THIS CONCEPT IN DOLLARS AND CENTS.
Photo credit: Allstate.com. No Copyright infringement is intended.
Is GAP insurance right for you?
SO, DOES IT ALWAYS MAKE SENSE TO PURCHASE GAP INSURANCE? CERTAINLY NOT. THIS QUICK LIST OF CRITERIA BELOW CAN HELP DETERMINE WHETHER OR NOT PURCHASING GAP INSURANCE MAKES SENSE IN YOUR SITUATION.
IF YOU:
MADE LESS THAN A 20 PERCENT DOWN PAYMENT
FINANCED FOR 60 MONTHS OR LONGER
LEASED THE VEHICLE (CARRYING GAP INSURANCE IS GENERALLY REQUIRED FOR A LEASE)
PURCHASED A VEHICLE THAT DEPRECIATES FASTER THAN THE AVERAGE
ROLLED OVER NEGATIVE EQUITY FROM AN OLD CAR LOAN INTO THE NEW LOAN
…THEN THE ANSWER TO GAP INSURANCE FOR YOU MAY BE “YES!”
Where to get GAP insurance
YOUR CAR DEALER MAY OFFER TO SELL YOU GAP INSURANCE ON YOUR NEW VEHICLE. HOWEVER, MOST AUTO INSURERS ALSO OFFER IT, AND THEY TYPICALLY HAVE MORE COMPETITIVE RATES THAN DEALERS. ON MOST AUTO INSURANCE POLICIES, INCLUDING GAP INSURANCE WITH COLLISION AND COMPREHENSIVE COVERAGE ADDS ONLY ABOUT $20 A YEAR TO THE ANNUAL PREMIUM. ALSO, YOU MAY WANT TO CLICK HERE FOR 20 TIPS FOR FINDING THE RIGHT CAR FOR YOU.
Bottom Line
Although every situation is different, it’s clear GAP insurance is a great option that can provide financial reassurance to some drivers. For even more guidance on choosing insurance coverage, check out our related blog post: What Type of Auto Insurance Coverage Should I Buy?
If you have any questions regarding Gap insurance, or any other legal questions, feel free to call us anytime at 337-504-3202.
BLOGGER’S NOTE: WE DO NOT ENDORSE ANY INSURANCE COMPANY. IN FACT, WE ARE OFTEN AT ODDS WITH INSURANCE COMPANIES AS PART OF OUR JOB IN REPRESENTING YOU. HOWEVER, ALLSTATE HAS A GREAT VIDEO ON THE SUBJECT OF GAP COVERAGE. YOU CAN VIEW IT HERE.