If you get in a car accident and your car is damaged, the last thing you want to learn is that you owe more than the car is worth – that's where gap insurance can come in handy!
When you buy a new vehicle, it begins depreciating the moment you drive off the lot. Most cars lose 20% of their value within a year!
Generic auto insurance policies cover the depreciated price of your vehicle. In other words, your insurance will likely only cover the vehicle's current market value at the time of the claim.
Gap Insurance, also known as Guaranteed Asset Protection insurance, is a type of auto insurance that covers the 'gap' between the actual cash value of your vehicle and the outstanding balance on your auto loan or lease.
In simpler terms, if your car is totalled, gap insurance covers the difference between what your vehicle is currently worth and what you still owe.
For example, let's say you bought a car for $25,000, and you still owe $20,000 on your auto loan. If the vehicle is stolen or totalled, and the insurance company determines the actual cash value is now only $15,000, your regular auto insurance will pay you $15,000.
However, you still owe $20,000 on the loan. This leaves you with a 'gap' of $5,000. Gap insurance is designed to cover this $5,000.
Who Needs Gap Insurance?
Gap insurance is particularly beneficial for individuals with a high or long-term loan balance. If you made a small down payment (less than 20%) or your vehicle's value depreciates faster than you're paying off your loan, gap insurance could be a wise investment.
If you owe more on your car loan than the car is currently worth, you should consider getting gap insurance. It's also useful for leased cars, as lease contracts often require it as a protective measure.
Pros of Gap Insurance
The primary benefit of gap insurance is financial protection. It safeguards you from having to pay out of pocket for a loan balance on a car you no longer have.
This insurance can provide peace of mind, especially for new car owners, as vehicles depreciate the most in the first few years.
It only costs a few dollars per month. (But gap insurance from a dealer is often overpriced.)
Cons of Gap Insurance
On the flip side, only some people need gap insurance. If you own your vehicle outright or have made a significant down payment, gap insurance might not be necessary. Also, it's an additional cost on top of your regular insurance premiums.
It’s also worth mentioning that gap insurance doesn’t cover everything. Here are a few items it doesn’t include:
Supercars, like Ferraris or Lamborghinis
If your car was totalled after it was stolen or driven without your consent by a family member or friend.
If your car was totalled while being driven with your consent by anyone who isn’t covered under your insurance policy.
In a nutshell, gap insurance can be a financial lifesaver in the event of a total loss or theft of your vehicle. However, it's not for everyone.
Understanding how gap insurance works and carefully assessing your financial situation can help determine whether this type of coverage is right for you.
Always remember, that the goal of any insurance is to provide protection and peace of mind. If gap insurance can offer you that, then it's worth considering.
Contact us today to learn more about gap insurance and if it's right for you!
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