There is a certain excitement that comes with the purchase of a brand new vehicle. Often we get wrapped up in the thrill of the new car and insurance isn’t even a thought as you drive off. Auto insurance is a major part of owning a vehicle, however, and you’ll want enough of it to protect your new car. When you lease or finance a new car, your financial institution will require you to carry full coverage to ensure asset protection. Unfortunately, when you drive your new vehicle off the lot, it will depreciate. It will also continue to depreciate with age. As a result, you might need additional gap insurance to pay off the vehicle if it’s totaled.
Car insurance is a necessity and state laws require you to carry a minimum amount of liability coverage to stay on the road. While you might need to carry liability and collision coverage based on financing, you might also consider guaranteed auto protection or GAP insurance. If you need to file a claim, your collision coverage or comprehensive coverage will step in to cover the depreciated value of your car. Gap insurance could cover the difference between the value and how much you still owe. Your need for gap insurance will depend on your auto loan and your vehicle type. Let’s take a closer look at gap insurance and who might need it.
Why do you need gap insurance?
If you’re leasing or financing a new car, lenders will require full coverage on your car until it’s paid off. As discussed, though, your car will depreciate as soon as you drive it off the lot. Estimates are that a car loses an average of 11 percent in value as soon as it leaves the lot. After five years, your new car could have lost over 30 percent in value. If you’re in an accident and you owe more on your loan or lease than the depreciated value of your car, your gap insurance could help. If you pay cash or have a large enough down payment, you might not require gap coverage as there won’t be a significant difference in depreciated value.
Depending on where you live, the rate of your vehicle’s depreciation can vary with your zip code. Additionally, from the state of Florida to North Carolina to California, gap insurance laws, restrictions, and limits can vary by state. Each state has its own rules about gap insurance policies and you’ll need to do research. Searching for gap insurance Florida, for example, will help you determine specific policies. Even though your car insurance policy provides full coverage, you might still be at risk of being underinsured.
How does gap insurance work?
Many people think that if they have full coverage insurance then they will be protected. Understanding gap coverage, however, means knowing about depreciation and how insurance providers pay. If you purchase a brand new car for $30,000 and the car is totaled when you still owe $20,000 on the auto loan, you might have to come up with additional cash. Because of loan terms and monthly payments, you could have been driving your car for a while but not have made a significant dent in your loan balance.
In this scenario, your insurance company pays your lender the amount equal to your totaled car’s depreciated value. Since you’ve been driving, your car’s value might have decreased to $18,000. Without gap coverage, you would have to pay your lender an additional $2,000 to settle your auto loan. If you have gap insurance coverage, your policy would kick in and help you with the $2,000.
If you’re considering gap insurance, it’s important to note that this type of coverage might have limits and could only be available if you’re leasing or financing a new vehicle. You’ll need to do some research to determine if gap coverage is right for you and if it’s available.