Gap Coverage

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Chris Tepedino is a feature writer that has written extensively about auto insurance for numerous websites. He has a college degree in communication from the University of Tennessee and has experience reporting, researching investigative pieces, and crafting detailed, data-driven features. His works have been featured on CB Blog Nation, Flow Words, Healing Law, WIBW Kansas, and Cinncinati.com. ...

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Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in...

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Reviewed by Rachael Brennan
Licensed Insurance Agent

UPDATED: Mar 30, 2021

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So you've decided to lease a vehicle - or better yet, you're fortunate enough to afford a brand new car. On the one hand, leasing or purchasing new means that maintenance and upkeep costs will be much lower. but at the same time, driving a new or leased vehicle can become very expensive if you don't find the right insurance policy. This is especially true if you don't add Gap coverage. below, will explain exactly what Gap coverage is and why it's so important on a newer vehicle.

Explaining Gap Insurance

If the worst-case scenario ever happens and you get into a serious, total loss accident with a new or leased vehicle, things can get very expensive very quickly. This is because of the "gap" between the total value of the car as new and the depreciated value of the vehicle after you've driven it off the dealership lot.

It's very important that you make sure do you know the difference between these two numbers. That's because, unless you purchase Gap coverage from your insurance agent, your insurer will only pay out the depreciated value of your vehicle if it happens to get totaled in an accident. And whether you have a loan or a lease, you will be responsible for the difference between the depreciated value and the replacement of your vehicle as new.

Vehicle (2016) MSRP As New Depreciation Financial Gap
Honda Accord $22,205 $19,785 $2,420
Toyota Camry $23,070 $19,732 $3,338
Jeep Grand Cherokee $29,995 $17,476 $12,519
Ford F-150 $26,540 $16,563 $9,977

In the chart below, you can see what that might look like for your pocketbook.

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When do you need automobile GAP coverage?

Who needs GAP Insurance? Well, any driver who believes their vehicle may suffer from depreciation (which is common when you buy or finance a brand new vehicle). Leased vehicles will also suffer a loss of value from depreciation. If you file a claim for any of the following:

  • Acts of God (I.e. natural disasters like hurricanes, floods, tornadoes, etc.)
  • Theft
  • Accidents
  • Vandalism

...your vehicle might get totaled and need to be completely replaced. In the event that this happens, either your Collision or Comprehensive coverage will pay for its replacement. But your insurance company will only pay the fair market value of your vehicle at the time it gets severely damaged; and that amount of money may vary drastically from how much you originally paid for your vehicle.

How GAP Coverage Works

Take the following scenario as an example: imagine you’ve purchased a brand new car for $25,000. Your down payment was only $1,000, and you’re making payments in the amount of $300 a month. You’ve owned the car for an entire year without anything happening. Congratulations. With your down payment and monthly payments, your loan has been reduced to $20,400.

Now imagine you get into a serious accident and your car is completely totaled right after your vehicle's 1-year anniversary. You go to your collision insurance provider and inform them of the accident. You pay your deductible, and then it is up to them to hold up their end of the bargain. The only issue is that the car’s market value has depreciated to $19,000. Your collision insurance covers you up to this amount, but you’re left with an unexpected $1,400 bill that you weren’t covered for. This is generally where GAP insurance kicks in and cleans up the mess.

Making an Informed Decision

Bear in mind that while GAP auto insurance will cover you for the majority of your total losses, there are some exclusions. These will vary from policy to policy, so it is paramount that you review your own policy carefully. Though to give you an idea, here are a couple of common exclusions:

  • Past due loan payments and associated penalties
  • Anything installed that isn’t factory issue
  • Vehicles not insured by comp and collision
  • Deposits or penalty charges assessed on a lease agreement

When should you purchase automobile GAP insurance? GAP insurance makes sense if you know you will owe more than the vehicle is valued at for a prolonged period of time.

GAP insurance really shines when it comes to leases. In fact, it is a prerequisite to getting many lease agreements. One of the appeals of leases is their low monthly payments, usually lower than auto loan payments. This means there will be a large GAP between the car’s market value and what you’ve paid off.

In the case of purchasing a new car, the car depreciates the second you drive it off the lot. Consider interest rates, depreciation rate, and the amount of down payment you’re giving. If you give a sizeable down payment, perhaps it won’t make sense for you to have GAP coverage.

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How to Shop for Gap Insurance

When shopping around for gap insurance coverage, it won't take you long to discover that not all gap insurance policies are created equal. For starters, certain companies don't offer gap insurance at all, and it's important to check with an agent before signing the dotted line on a policy for a brand new vehicle. Other companies limit the amount of coverage they will provide (such as, for example, 25% of the original value of your new vehicle is a popular industry standard). furthermore, some car insurance companies have very strict rules in place that may disqualify you from purchasing Gap coverage in the first place. Many insurors only offer coverage for new vehicles. And companies like State Farm, for example, won't offer it all unless your auto loan is taken out through their own personal bank.

Ways to Avoid Gap Insurance

If you're worried about how much more expensive your insurance policy will be with gap coverage, we want to reassure you that there are some affordable options out there. But then again, there are certain situations in which it may not make financial sense to spend the extra money on this writer. It really all depends on the type of vehicle you are trying to cover.

Average Insurance Premiums: Old vs. New Car Legend: 2014 Honda Accord 2018 Honda Accord Alabama Texas Wisconsin Colorado Florida 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 $83 $142 $116 $172 $137 $180 $162 $210 $166 $176

Brand new vehicles (or leased ones) make the most sense to find Gap coverage for, because your Financial liability maybe so high that it takes a while to pay off that debt and afford a new one. While this may make your monthly premiums more expensive trauma you won't have to worry about maintenance costs or mechanical problems (like you would with an older vehicle), giving you a financial cushion to afford those higher premiums.

Older vehicles are easiest to purchase with cash up front, won't require a monthly car payment, and best of all - you'll be able to purchase less insurance coverage. however, maintenance costs on older vehicles can eventually become prohibitively expensive. You may eventually find yourself stuck with a broken down vehicle and no way to fix it - all because you were trying to go for the better deal.

Average Insurance Premiums: Old vs. New Car Legend: 2014 Honda Accord 2018 Honda Accord KansasMissouriNebraska ArkansasMassachusetts 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 $101$174 $149$216 $81$147 $123$187 $117$201

At the end of the day, it's important to make sure you know what you're getting into with a new car insurance policy - especially if your vehicle is brand new or being least. He's on your special quote generator can help you find the policy you need at the right you can afford. We invite you to take a look at quote available near you.

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