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What Is Gap Insurance and What Does It Cover?

Posted in car accidents on November 13, 2018

Buying a new vehicle entails much more than paying a large down payment and arranging financing options. New vehicles require registration and insurance, and generally cost more to insure than older models. Vehicle owners need to carefully shop for auto insurance that not only meets their state’s requirements for coverage minimums but also provides the policyholder with a good balance of coverage at an affordable premium.

Most vehicle owners know that as soon as a person purchases a vehicle and drives it off the dealership lot, the vehicle starts losing value. The Insurance Information Institute (III) reports that most vehicles lose about 20% of their initial value within the first year of ownership. Despite this, most standard vehicle insurance policies only cover the depreciated value of an insured vehicle. This means if a policyholder has an accident, the insurance coverage will refer to the value of the vehicle at the time of the accident, not when the owner bought it. To learn more, speak with a car accident lawyer in Bakersfield.

Gap Insurance Offers Peace of Mind

When a driver purchases or leases a new vehicle with only a small deposit, he or she finances the vehicle and makes monthly payments to pay it off in full over time. The vehicle continues to depreciate in value as the owner makes these payments over a few years. Gap insurance can help a new car owner feel more at ease and soften the financial blow after an accident. When an accident happens involving a vehicle the driver hasn’t fully paid off, gap insurance covers the difference between the current market value of the vehicle that the insurance policy will cover and the amount the driver still owes on the vehicle.

For example, John buys a new car for $20,000. One year later the market value of the vehicle has dropped to $13,000, but John has only paid $3,000 off the full price, owing a remaining $17,000 on the vehicle. If John gets into an accident with gap insurance coverage, the gap coverage will apply to the $4,000 difference between what John still owed on the vehicle and the current market value of the vehicle at the time of the accident.

When to Consider Gap Insurance

New drivers or drivers purchasing a second or third vehicle generally have many options when it comes to insurance coverage. A few indicators that a driver should consider gap insurance coverage with an auto insurance policy include:

  • Down payment amount. If the driver paid only 20% or less of the vehicle’s value as a down payment, it is a very good idea for the driver to purchase gap insurance for at least the first few years of owning the vehicle.
  • If the buyer finances the vehicle for more than 60 months, it will take quite a while to pay off the remaining balance. The vehicle will likely depreciate significantly during this time, so gap insurance can be very helpful for an accident in the first few years.
  • When a driver leases a vehicle, he or she doesn’t technically own the vehicle, so the dealer or seller will need some guarantee that the driver will take good care of the vehicle. Gap insurance is usually a requirement for leasing a vehicle.
  • Rapid devaluation. Some vehicles lose their value more quickly than others. Well-built vehicles in high demand typically retain their value longer than models discovered to have defects or common issues.
  • Negative equity. Some drivers will roll the negative equity leftover from a previous car loan into a new loan. This could increase the effective cost of the vehicle beyond its actual value, but the vehicle will still depreciate over time. Gap insurance offsets the financial risk of an accident significantly in such cases.

Some dealerships and car sellers will offer gap insurance for a new vehicle purchase or lease, but many private insurance carriers also over gap coverage. This type of coverage may only cost about $20, added onto the policyholder’s existing policy, but every insurance carrier offers different rates and package options.