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Gap Insurance: Should You Buy it for Your New Car?

Gap Insurance is one topic that has many Illinois Car Buyers confused. Should I buy it? Do I really need Gap Insurance for my new car purchase?

We will get to our answer later, but first lets talk about what Gap Insurance is and what it covers.

Gap Insurance can be defined as: 

"Gap insurance has one main goal: to pay off the balance of a loan or lease if the vehicle is totaled and the loan or lease balance exceeds the actual value of the car."

gap insurance vehicle

Now lets give an example of how Gap Insurance would work. 

You buy a brand spanking new car for $35,000 and make a small down payment and finance the rest. One year later you’re in an accident that wipes out your car. The insurance company writes a check for the current value of $28,000. Your loan balance is $32,000. The gap insurance will pay the $4,000 loan balance ($32,000 – $28,000).

Think this can’t happen? It does all too frequently. We’ve paid several claims where this exact situation occurred and our customer was so happy to have Gap Insurance. It may have been 9 months or 2 years down the road, but it has happened. And let me tell you, nothing is more painful than having to continue paying for a car you no longer have. And if you still owe money- you still must pay. Gap insurance makes this pain go away.

Sounds like a No-Brainer so far!

Risk of Financial Disaster

Car loans are changing. It is not uncommon for loans on new cars today to be 66, 72 or even 84 months. While the longer loans give you more time to pay and reduce your monthly payment, they also increase the risk of financial disaster if the car is totaled during the loan period.

A broad rule of thumb is that cars depreciate 25% in the first year, lose half their value after three years and are worth about two-thirds their purchase price at five years. But balances on longer loans don’t shrink as quickly, leaving drivers financially exposed.

A $27,000 car bought with no down payment would be well "under water" in the first year under almost any new-car loan, and in the red after three years on any loan longer than five years. On an 84-month loan, you’d owe more than the car is worth for 60 months.

That's why it is wise to find out more about Gap Insurance.

Because you took out a loan on your car the bank requires you to keep "Full Coverage" on the car. Meaning you must carry collision and comprehensive coverage to repair the car if it is in an accident in order to protect their investment in the car.

But No Insurance company on the planet will pay you more than the Actual Cash Value (ACV) of the car if it is stolen or totaled. How much you owe on your car loan is not a factor in determining the value of your vehicle.

The difference between what the insurance company offers and what you still owe on the car is the "Gap" you are trying to cover.

 Where Can You Buy Gap Insurance?

There are 4 basic ways for you to buy Gap Insurance.

  1. From the Dealership
  2. From Your Insurance Agent (If the car is NEW, It will not be available for previously titled vehicles)
  3. From stand alone Gap Insurance Providers like GapDirect
  4. Your Bank or Credit Union may offer Gap Insurance as part of their loan package.

How Much Does Gap Insurance Cost?

You need to compare Gap Insurance estimates before you finance your car. Most dealerships offer gap insurance but it may cost 50% more than what you might be able to get from your insurance agent says veteran credit insurance professional Scott Henderson of Corona Del Mar, Calif.

"Prices [for the same policy] can range from $300 to $700," he says. "It's one of many things that [a consumer] should educate themselves about before they go to the dealership. Many people have their first exposure to gap at the dealership."

You can buy gap coverage through many insurance companies, too. They often refer to it as loan/lease payoff coverage. Expect to pay 5% to 6% of the combined annual cost of your comprehensive and collision premiums. That is, if you pay $1,000 a year for comp and collision, you pay an additional $50 to $60 a year for gap coverage.

Know the differences in the Gap Insurance Options.

One important factor to consider is your ability to manage your Gap Insurance once you are no longer "Under-water" or Upside-Down" on your payments. Check the conditions under which you can drop the Gap Insurance and find out if you will be refunded any unused premium. Most policies from the dealership you will be forced to pay for it for the entirety of your loan, even after you no longer need it because it is factored into your monthly payments.

Another benefit of adding Gap Insurance to your car insurance policy is that you can drop the coverage at any time. So when you finally have that new car paid down enough that you no longer have a "gap" to be covered. You simply call your agent and ask them to remove the coverage.

The Final Answer: Adding Gap Insurance is just a smart financial decision.

I have seen many articles on the internet saying just the opposite, but those articles will not pay the difference between what you owe and what your car is worth. I have also seen several people who avoided financial disaster by having this overlooked coverage. Like any insurance policy, auto insurance is meant to protect you from a financial catastrophe. Adding gap insurance to your auto insurance policy is just one more way to accomplish this goal, at a very affordable cost.

You may prefer to buy your Gap insurance at the dealership and that is fine. Just make sure you properly protect yourself from Financial Disaster by purchasing Gap Insurance for your new car.

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Rueck Insurance is your independent, one-stop insurance center for all your personal and business insurance needs in Illinois. Insurance shopping is easy when the Protection Team provides you with multiple quotes to choose from. You will always know you are getting the best coverage at the lowest possible price.

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Rueck Insurance is your independent, one-stop insurance center for all your personal and business insurance needs in Illinois.

702 Bloomington Rd#205
    Champaign, Illnois
(217) 355-9075
dave@insuringchampaign.com

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