FRIDAY, FEBRUARY 26, 2021
When you think about getting in a car accident, there’s probably a million scenarios that run through your mind. One that probably isn’t a top-of-mind concern is whether your insurance policy will cover the full cost of replacing your car if it is totaled. In fact, many car owners wrongly assume that their policy will cover the full cost of replacing their car at the price they originally paid or will pay off the remaining amount of a car loan. That’s where gap insurance comes in handy.
What Is Gap Insurance?
Guaranteed asset protection, or gap insurance is an optional automobile coverage that helps you transfer the financial risk if you are involved in an auto accident and you owe more for your vehicle than the amount that it’s worth. This is referred to as being “upside-down.”
Since a new car’s value drops significantly the minute it’s driven off the lot, if you are involved in an accident that totals your vehicle in the first few years you own your vehicle, you may find yourself owing the finance company more than the vehicle’s actual value. Gap insurance provides for the “gap” between the two amounts.
Is Gap Insurance for Everyone?
Not everyone will benefit from or need gap insurance. Consider the following situations:
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New vehicle financing options: If you took advantage of a zero percent down payment deal or put a small amount of money down, or stretched the life of your loan past 3 years, gap insurance is most likely a good idea. That’s because the vehicle typically depreciates considerably faster than you have paid down the value on your vehicle’s loan.
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Used vehicles: Gap insurance is typically not available for used vehicles. To cover your risk, it’s wise to put down an ample down payment and finance the vehicle for the shortest possible timeframe.
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Leased vehicles: For those who lease a vehicle, gap insurance is considered an essential coverage because typically there is no trade-in and little cash put down to lease the vehicle. Similar to purchasing a vehicle, if the car is a total loss, you will owe the difference between what you have paid and what you owe on the balance of the lease.
Top Ways to Save on Your Auto Premium
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Consider raising your deductible.
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Ask about multi-policy discounts.
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Ask about safe-driving discounts.
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Keep up your good driving record.
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Drive less to qualify for a low-mileage discount.
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Drive a car with safety features such as anti-lock brakes and airbags.
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Install an anti-theft device.
Summary
If you have a brand-new vehicle, a long-term auto loan, or are leasing a vehicle, it may be in your best interest to secure gap insurance to protect yourself from financial hardship in the event you are in an accident.
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