Many people have heard of GAP insurance, but most people don’t know the true value of carrying GAP coverage on your Auto Insurance policy.
When you lease or finance a new automobile, the vehicle starts to depreciate the moment it leaves the lot. In fact, most automobiles lose about 25 percent of its value within the first year, and as much as 50 percent by year three. In the event of a total loss, a standard auto insurance policy is designed to pay the bank the “Actual Cash Value” of the vehicle which takes the depreciation into account. If you financed a vehicle and only made a small down payment, the amount of the loan may exceed the actual cash value of the vehicle for the first few years of the loan. GAP insurance is available to cover the “gap” between the amount owed on the loan, and the actual cash vehicle of the vehicle at the time of the total loss.
Many car dealerships will attempt to sell GAP coverage as part of the loan/leasing package however, it’s generally cheaper and much more convenient to waive the GAP coverage from your loan and elect to add it to your auto insurance policy (check with your agent to make sure your carrier offers GAP). When you purchase GAP from the dealership, unless you pay for it in cash, they will roll that cost into the loan meaning you’re paying interest on the GAP coverage which further increases the total cost. Some dealerships have also been known to charge you whatever they want for the GAP coverage based on the monthly payment you told them you were willing to pay.
Carrying GAP coverage directly on your auto insurance policy also makes the claims process more streamlined since the auto insurance company is the only one paying for the loss. Many GAP insurance policies from the car dealerships have separate deductibles, as well as separate appraisers and getting the two parties to work together and agree on a result can be difficult.
If you’re purchasing a brand new vehicle, many auto insurance companies now also offer “New Car Replacement” for newly purchased vehicles less than a year old, which will actually pay for the total replacement of the vehicle in the event of a total loss, eliminating the need for any GAP coverage.
You should strongly consider GAP coverage if any of the following applies:
- Lease a vehicle
- Finance for 60 months or more
- Put less than 20% down
- Roll negative equity from a previous vehicle loan into a new loan
- Purchase a vehicle with high a depreciation rate
If you’d like more information about GAP coverage check out the link below: