Have you ever purchased a brand-new car? It had that new-car smell. The odometer readout was near zero. The paint was bright and shiny. You were excited to drive off the lot and put the first miles on your untainted vehicle.
Guess what else happened as you drove off that lot? The vehicle started depreciating. According to Kelley Blue Book, most cars lose about 20% of their value in the first year.
This rapid depreciation could pose a problem for insurance claims. If your initial deposit on the car was small, the loan amount that you owe may be higher than the value of the car.
If your vehicle suffers extensive damage or is totaled in its early years (before you have paid down that loan), your insurance coverage may not provide enough to pay off the vehicle. Why? A standard auto policy typically covers the depreciated value of the car. In other words, it will pay what the car is currently worth on the market when you make your claim.
If this amount is less than what you owe on the car, gap insurance comes into play. It will cover this difference (the gap).
This extra coverage can be helpful in several circumstances.
Long-term financing: If you financed a vehicle for 60 months or longer, you might need gap insurance to provide adequate coverage.
Leasing: If you lease a vehicle, gap insurance is often required as part of the lease agreement.
Lost value: Some cars depreciate faster than others. If your model depreciates faster than average, gap insurance could prove useful.
Low down payment: If you put less than 20% down on the vehicle, this insurance will help cover the gap between the value and the balance of your loan that will most likely exist for a while.
Are you unsure whether you need gap insurance? Contact our office to review your current auto policy and determine whether this coverage makes sense for you and your vehicle.