What is Gap insurance and how to determine if you need it is an important question you need to ask when purchasing a new vehicle. Some key points will help you make this important decision.
Gap insurance covers an amount of money.
The amount it covers is the difference between the total value you financed to buy a car and the value of the same car if an accident occurs and the car experiences total damage. For example, you buy a car worth $22,000, and your loan is for $20,000. Six months after you take possession, another vehicle broadsides you and your car is damaged beyond repair. The insurance adjuster checks out Kelly Blue book and comes up with the used value of your car, and it is only $18,000. You have a gap amount of $2000. The insurance company is only going to write a check to the bank for your vehicle loan of $18000. Unless you have gap insurance to cover the additional amount, you will still owe the bank $2000.
Is Gap insurance is sold for new cars only?
Gap insurance is most commonly sold for new cars, but some companies offer it for used cars as well. Be careful to find out how much the policy you are considering will cover. You may not get the full gap amount as some policies are written for no more than 125 to 150% of the book value of the car. It is especially important for new cars because new cars lose value the minute you drive them off the lot. Once your car is used, it is worth much less, often several thousand dollars or 25% to 30% of it’s new value.
Where do you purchase “gap” insurance?
Car dealers often sell this coverage as an additional financial product when they sell you a loan through a finance company. They will tell you about it and include it in your final payment. Their rates are typically higher than you could get elsewhere.
You can also purchase this coverage from your car insurance provider. You should ask about it when you call for a quote for the new car you are considering or when you call to add the car to your policy.
Do you need to make the decision to purchase gap insurance immediately?
You will have a window of time to purchase this coverage. Most insurance providers will sell it to you anywhere from 60 days after your new car purchase up to 12 months.
The important thing is to check it out, preferable ahead of time so when your are ready to buy your car, you already know whether you will need gap insurance and where you will get it. You will not be sorry that you did. The only unhappy person will be the one paying off a loan balance for a car they no longer have!
Note: The information provided in this article is general information only. Insurance is regulated by each state and consequently how the contracts are written are specific to each state. It is always wise to get the advice of a licensed agent in your own state before making insurance decisions.