When you’re shopping for auto insurance and looking to compare car insurance rates, you’ll hear about a wide variety of insurance coverages that may or may not be necessary for you and your situation. One insurance coverage type that is certainly worth considering when purchasing a new automobile is gap insurance coverage.
Gap insurance does just what it says, by helping you to bridge the gap between new car depreciation and what you’d owe your lender in the event of a total loss.
These are a few of the distinct benefits it offers drivers today.
When Gap Insurance Might Be Necessary
Automobiles today depreciate at rapid rates. Edmunds reports that one minute after leaving the lot your car value depreciates approximately 91 percent. By the end of year one, the “true market value” (TMV) for your car is down to only 81 percent of the original TMV. By the end of your fourth year of ownership, it is worth less than half of that.
Unfortunately, many new cars are financed for six or even seven years, meaning the amount owed on your vehicle during these first four years is likely to be substantially greater than any settlement the insurance company will pay for a loss. Carriers determine the amount of money paid on claims based on the actual cash or true market value (TMV) of the vehicle (what someone is likely to pay when buying). Gap insurance covers the difference between what you owe and what the car is actually worth to pay off the money you still owe your lender.
It Costs Very Little for the Advantages It Provides
According to Bankrate, the best way to estimate the cost of your gap coverage is to look at your comprehensive and collision premium. You can expect to spend 5 to 6 percent of that on gap insurance.
While covering the gap in what your vehicle is worth and what you owe may put a little extra sting in your insurance payments, it might be a little pain for a lot of good if you owe more than what your car is worth after depreciation.
Helps Lenders Accept Lower Down Payments
If you don’t have a lot to put down on your vehicle purchase, opting for gap insurance may make your lender more hospitable to a lower down payment – especially when financing for longer periods of time. Your lender may even require gap coverage before offering an auto loan.
What’s the Bottom Line?
Understanding the types of coverage you need when buying a new car can be confusing. Gap insurance is a worthy investment whenever you lease your vehicle, finance for 60 or more months, pay less than 20 percent of the value in a down payment, or drive more than 15,000 miles, on average, per year.
Working with a trusted insurance agency can help you get the protection you need without purchasing unnecessary and irrelevant insurance products.