What is GAP insurance and do I really need it?

There are few things in life quite like the feeling of driving a brand-new car that you just purchased. The immaculate clean look and feeling of the inside, the incredible new car smell that wafts through your nostrils, and even the envious looks of your friends and neighbors as you pull your beauty into the driveway. Yes, owning a brand-new car is truly one of life’s great pleasures. On the flipside, one of the most disappointing things that can happen in life is when you and your new car are involved in an automobile accident.

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Everyone expects to keep their new car in pristine shape throughout its life but this is seldom the case. Scratches and bumps and dings do occur and in worst case scenarios, you could be involved in a serious accident that could even total your brand-new prized possession. The realization that the new car you just purchased is now headed for the junkyard can truly weigh heavy on your heart indeed. The only saving grace is that at least you have a full coverage insurance policy, or so you thought.

Unfortunately, getting involved in an accident with a brand-new vehicle can have another downside to it other than just the damage to the vehicle itself. You might be surprised when the car you just paid $30,000 for is only valued at about $24,000 by the insurance company in the event of a total loss. Your frustration may turn to outright anger as you try to explain to the insurance company that you just paid $30,000 for this vehicle just a few days ago. As time wanes on, you begin to realize that the settlement offered by the insurance company is the maximum you can expect to recover. Once the $24,000 has been applied to the loan, you now owe $6000 for a vehicle you don’t even have anymore. Well, this scenario is not an isolated incident, it is actually a fairly common occurrence and it can happen to you as well if you don’t have a protection called GAP insurance.

You see, when a brand-new vehicle is on the lot of the dealership, is worth a certain price. When you sign the paperwork to purchase the car, it is still worth that price. Mysteriously, however, when you pull the vehicle off the lot, the value of it quickly diminishes. When a brand-new vehicle has been purchased and is being driven by a brand-new owner it loses significant value almost immediately and this is called depreciation. In addition, your auto insurance policy is only required to pay for damages to the vehicle up to the total value of the vehicle at the time of the accident.

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Taking into account this depreciation, and the fact that you have yet to make any payments toward the loan, someone who gets into a total loss accident soon after purchasing a vehicle will experience a gap in the amount of coverage they have on their policy versus what they old on the vehicle loan. This gap is often thousands of dollars and is usually not taken care of until somewhere after the first year of owning the vehicle. Gap insurance is a type of coverage that will provide you additional money over and above what the insurance company will offer for your vehicle to make sure that you can pay off your vehicle in full if it is totaled in an accident.

If you are purchasing a brand-new vehicle, gap insurance really does make sense, unless perhaps you paid cash for the vehicle and don’t owe the bank anything. Dealerships will often try to sell you GAP insurance at the time you purchase your new car but it is wise to do your due diligence as purchasing from the dealership may not be the best idea. Be wary of anything and everything that a car salesman wants to put into the contract as you will end up financing the amount of whatever it is that you add over the length of your vehicle loan. Another thing to keep in mind is that the actual price of the GAP insurance as purchased through the dealership might be quite a bit more expensive than if you purchased it elsewhere such as your existing auto insurance company. Another option to obtain this GAP coverage is to search for a vehicle loan that includes GAP coverage as part of the loan itself.

This can truly be a fantastic deal and it is simply an incentive thrown in by the bank to help earn your business and will result in your paying zero dollars out of pocket for coverage that may end up paying you thousands of dollars if your car is totaled in an accident.
As you can see, in certain circumstances, GAP insurance can be a fantastic safety net to help protect your financial situation should the worst happen. Keep in mind, however, you may not have a need for GAP insurance much after the first year of owning the vehicle because the payments you have been making on the loan will have paid it down significantly and once you owe about the same amount of money as the car is worth, you will no longer need to keep this coverage.

photo credit flickr: ryantxr & wishymom

This entry was posted on Wednesday, August 12th, 2009 at 7:18 pm and is filed under article. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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