Buying a new or newer car is a major investment. If you’re like most people, you’ll be very careful to make sure you have your investment fully insured. But did you know that even with full insurance coverage you could still end up with a financial problem if your vehicle is damaged to the point of a total loss?
If your vehicle is totaled due an accident, fire, theft or other covered cause, most insurance policies cover the vehicle’s current “Actual Cash Value”. This means that your insurer will complete a market appraisal of your vehicle – factoring in its age, pre-loss condition, mileage, options, etc. The idea is that the carrier will pay you the average price that your vehicle would have sold for in the local area.
A problem arises if this appraised “Actual Cash Value” is less than what you owe on the vehicle. This can often happen if you purchased a brand new vehicle without a large down-payment or trade-in credit. Vehicle depreciate most rapidly right after they are purchased new, meaning that if you financed all or most of the purchase price, you could almost immediately find yourself “upside down” – owing more than what the vehicle is worth.
This same scenario is likely to come into play with leased vehicles, as you often don't pay enough down on a lease to avoid being upside down immediately.
If you are in fact “upside down” at the time of a total vehicle loss, a normal policy will only pay the depreciated value, leaving you on your own to pay the difference to the bank. However, if you purchased Gap coverage, it will pay off this difference (i.e.,“gap”) for you. We should note that some insurance companies may limit how much Gap can pay – for example, maybe an additional 25 percent of the vehicle’s value. Also be aware that you will still be responsible for paying your deductible.
Most insurance companies offer Gap coverage when you add a brand new vehicle to your policy; a few carriers also offer it on used vehicles. Once on your policy, it typically remains until you notify your carrier that the car is paid off (unless you request that it be removed earlier).
When you are signing your vehicle purchase or lease agreement, your dealer will often offer you Gap coverage. If you buy it from your dealer, you will prepay for the entire term of your loan, typically adding several hundred dollars to the purchase or lease price. Buying Gap coverage on your Auto insurance will likely save you quite a bit of money. While rates can vary, we often see Gap coverage priced at only $3 to $5 per month on an Auto policy.
Whether you buy Gap coverage from your insurance carrier or from your dealer, it is typically only available at the time you buy or lease your vehicle; you probably won't be able to go back and add it later down the road.
As you can see, Gap coverage can be a valuable add-on to your insurance protection. While it is almost always a good idea for a lease and is often advisable for a vehicle purchase as well, there are times when it is probably not necessary. If you make a healthy down-payment (or trade in a vehicle with sufficient value), you may have plenty of equity in your vehicle at the time of purchase. As long as you have done the math and are comfortable that you will payoff your loan faster than the vehicle depreciates, Gap coverage may not be necessary in your situation.
About the Author
Agent Ken Cobb
Ken Cobb is owner of Pine Country Insurance and has been active in the insurance industry for over 15 years. Meet Ken.
Coverage descriptions found in this blog are summaries provided for general educational purposes and cannot fully detail the terms, conditions, limitations or exclusions of a specific insurance policy. Please read your policy carefully.