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Gap insurance isn’t for everyone. For starters, gap insurance isn’t required by law and only applies to drivers who take out loans to pay for their vehicles. If you own your vehicle outright, or if the balance of your auto-loan is less than the value of the vehicle, then you don’t have to worry about this form of auto insurance coverage. However, if you need gap insurance, it can save a huge sum of money should you get into a costly car accident.
Photo by Adam Stefanca on Unsplash
Filling in the Gaps
What does gap insurance cover? It helps make up the difference between what a policyholder owes on their car loan and the vehicle’s value at the time of an accident. This gap exists because standard car insurance doesn’t pay the full balance of the loan or lease agreement should a policyholder total their vehicle. The provider will only pay up to the listed value of the vehicle when the accident takes place.
Every leasing and finance company is unique, and there are no standard state or federal laws that require borrowers to have gap insurance. However, individual lenders may require it at their own discretion.
In some cases, a lender may offer a gap waiver provision in a car financing contract. Under these circumstances, the consumer is not liable for the gap between coverage and financial balance.
Understanding Car Value Depreciation
The moment you purchase or lease a vehicle, the car begins to depreciate, and its value will continue to decrease exponentially. Why does depreciation matter?
The terms of your loan or lease agreement are based upon the fixed cost of the vehicle at the point of purchase. Meanwhile, your automobile insurance compensation is based on the vehicle’s current value when you submit a claim. This difference often leaves borrowers “upside-down” on their loan, meaning they owe more on their loan than the value of their car, due to depreciation.
The cost of gap insurance largely depends on how you choose to pay. You can:
- Purchase the coverage through your auto insurance provider and add it to your policy
- Buy gap insurance as a stand-alone payment plan
- Get gap insurance through the lender for your car loan
Furthermore, the financial risk of not having gap insurance depends on the vehicle’s original price, the amount taken out on loan, and when the damage to the car occurs.
Keep in mind that without gap insurance, the money you stand to lose decreases over the course of ownership. If you buy or lease a brand new car and then total it soon after, you could face out-of-pocket expenses of thousands of dollars before you even replace it. On the other hand, if you total the vehicle when it’s almost paid off, the “gap” itself is smaller.
You’ll also have to consider what you pay for other forms of car insurance coverage. You’ll likely need (or opt for) collision insurance, comprehensive insurance, damage liability, injury liability, uninsured or underinsured motorist coverage, and personal injury protection. Buying a vehicle and paying for insurance coverage can add up quickly, so you’ll have to pick and choose where to spend more and where to spend less.
A Final Consensus
So, is gap insurance worth it? The answer to this question depends not only on circumstances but also on a person’s level of comfort with taking risks. As with all insurance policies, deciding whether or not to have gap insurance comes down to a cost-benefit analysis. If you’re someone who can’t afford to put thousands of dollars for a car on the line and wants better peace of mind, having gap insurance will serve you well.