The moment you drive a new car off the lot, it’s value plummets. Sometimes as high as 30%! The used auto market is not what it used to be. With a few exceptions, a car that you paid $30,000 for six months ago, might easily be worth less than $20,000. If you have a loan or a lease on your car, then you are probably “upside down” for the first few years of the term.
What happens if you get in an accident? The insurance company is only obligated to pay you for the “current value” of the vehicle. While that sounds reasonable, the bank still wants the full value of what is left on the loan.
A recent example in our office looked like this:
Our customer had purchased a Honda Civic a little over a year ago. As she had put “$0 Down” on the car, her loan balance remained $16,000. The car was totaled in an accident, and the insurance company determined that it was only worth $13,000. Our customer was “short” $3,000 on the difference between her loan and the value of her car.
You need Gap Insurance!
As the name implies, gap insurance covers what traditional car insurance doesn’t. In other words, it closes the gap between what your auto insurance company pays if your car is stolen or totaled and what you owe the finance company. Gap coverage is a very inexpensive endorsement that can be added to most automobile policies to provide this valuable coverage.
“Even though gap insurance is important for people who buy cars, it is essential for those who lease,” says Mary Butler, senior editor of cars.com. “Gap insurance basically originated with leasing.” The upside-down nature of a typical lease is even more common than a purchase situation because the lessee usually has no trade-in and usually puts little or nothing down. Similar to a purchase, if the car is a total loss, you owe the difference between what you have paid and what you owe on the balance of the lease.
That’s why gap insurance is a must for many drivers. In fact, gap insurance is usually mandated by lease contracts or included within them. If a gap policy is required but not included in your contract, you should make sure you add it to your auto insurance coverage. If gap coverage is included in the car lease, check to see how much is offered and how much you’re going to be paying for it. (In some cases, lease contracts may include what is known as a gap waiver, which protects you from gap charges in the event that the leased vehicle is declared a total loss — eliminating the need for a gap policy.)
A few things to keep in mind when buying gap insurance:
- Although most people purchase it when a lease is initiated, some car insurance companies will sell you a gap policy anytime during the lease term.
- You must be in compliance with all terms of the lease.
- Your gap insurance policy may not be honored if you don’t have collision and comprehensive insurance coverage. Further, you may not be able to get the coverage, if you are financing a used vehicle
Many policies now provide Gap Insurance automatically, or we can quote you with one that does.
Feel free to call our agency if you have any questions about Gap Coverage, or would like an Auto Insurance quote. Call us if you would like to get a quote for your Home or Boat through us also, or would like a question answered on any type of insurance.FOLLOW US