Your new car is no longer worth what you paid for it.
Fortunately, gap insurance can help.
There are few purchases as exciting as a new vehicle. The leather seats, that new car smell…it’s magic. What’s not so magical, however, is the drop in your car’s value the second you drive it off the lot.
What if you totaled your brand-new set of wheels before you’ve finished paying them off? You probably haven’t thought about this scenario, but it could pose a significant problem.
Fortunately, there’s a type of insurance coverage that can help.
What Is Gap Insurance?
Gap insurance is an optional form of car insurance coverage designed to help you pay off your car loan if you owe more than the car is worth.
So how does gap insurance work?
Say you paid $40,000 for a new car with no money down. No matter what, you know you will have to pay off the entirety of that loan (plus some interest). However, your car lost roughly 10% of its value the second you drove off the lot…and that value will continue to drop the longer you own it.
One year after buying it, you get into an accident and your car is totaled. You turn to your collision coverage, which pays you what the car is worth. There’s only one problem: they will only pay you what your car is worth today…not how much you have left on the loan.
So if your vehicle is now worth $32,000 and you have $35,000 left on your loan, you would be on the hook for the remaining $2,000.
This is where gap insurance comes in!
Gap insurance is designed to cover the gap between your car’s actual cash value (ACV) and the amount you still owe.
Can I Get Gap Insurance On a Leased Car?
Yes! In fact, it’s not only possible to get gap coverage on a leased car, the lessor might even require it.
Even though you do not own your leased vehicle outright, you still agreed to pay the financing company a certain amount of money every month for a certain period of time. Totaling the car doesn’t release you of this obligation!
Gap insurance can step in to cover the difference between the amount left on your contract and the actual cash value of the vehicle.
How Much Is Gap Insurance?
Unfortunately, there are too many factors that determine your gap insurance premiums to give you an answer in a blog. Each underwriter calculates premiums differently, and no two cars or policyholders are the same.
On average, gap insurance coverage may add between $5-40 onto your monthly premiums, however this amount may not apply to your case. For this reason, it’s best to speak to an independent insurance agent so s/he can give you a more accurate quote based on the information you provide to them.
Gap Insurance vs New Car Replacement
It’s important to note that gap insurance can be a great option for helping you pay off your car loan. However, it won’t give you money to purchase a replacement vehicle.
For that, you need new car replacement coverage.
So, what’s the difference? Firstly, new car replacement typically only lasts for the first years or so that you owe the car. Gap insurance, on the other hand, may last as long as the entire loan period.
Second, new car replacement is designed to give you the funds to replace your damaged car (usually with one of the most current year, make, and model). Gap insurance is designed to help you pay the entirety of your car loan.
The final difference is the cost. New car replacement coverage is often pricier than gap insurance.
Another important thing to note is that some insurance carriers will not allow you to purchase both gap insurance and new car replacement. Discuss your situation with an independent insurance agent for more guidance.
Is Gap Insurance Worth It?
If you owe more than your car is worth (and are concerned about how you would pay off the remainder of your loan), gap insurance can be a useful addition to your auto insurance policy. However, it’s a good idea to reevaluate your coverage every year.
As your loan decreases, you will eventually reach a “break even” point, at which your car is worth the same amount or less than you owe. Once you reach this point, it would likely not be worth paying for this coverage.
A good independent insurance agent should be able to answer any questions about your current coverage and can help you decide whether it’s time to adjust your policies.
Whether you’ve owned your car for three months or three years, Harry Levine Insurance wants you to enjoy it for as long as you can. And part of enjoying your ride to the fullest is not worrying about the many risks on the road.
We are proud to offer Florida with quality coverage that answers your most pressing questions and gives you the peace of mind you need.
Give us a call today or fill out our online quote form to see how we can help!