What Is Gap Insurance?
The value of a new car starts to depreciate as soon as you drive off the lot. During the first year of ownership, the vehicle loses roughly 20 percent of its original value!
In the event of an accident, your insurance carrier provides reimbursement based on the vehicle’s current market value. What if the amount you still owe on the vehicle greatly exceeds this number? That’s where gap insurance comes in.
Gap insurance is a backup measure when you owe more than the market value or you’ve leased the vehicle. In general, standard car insurance reimburses the actual cash value (ACV) and gap insurance helps make up the difference to pay back the loan in full. For gap coverage to apply, you must be the original leaseholder or loan owner.
As you think about buying or leasing a brand-new car, factor in the following points.
How Does Gap Insurance Work?
Gap insurance works together with your standard policy’s collision and comprehensive coverage to help pay back your vehicle’s ACV, should theft occur or a crash totals the car. Gap insurance will not pay to repair your car.
When you file a claim, reimbursements from your standard and gap insurance carriers to your auto lender pay off the remainder of the loan. If your vehicle is totaled while you’re still paying off the loan, gap insurance will not help you buy a new vehicle but a car replacement coverage rider further supplements your existing policies.
Gap insurance is not always limited to new cars. Based on make and model, the loan or leaseholder can take out this coverage on a used car that is no older than two or three years.
What Does Gap Insurance Cover?
Gap insurance is only applicable in a handful of instances, when your car is damaged beyond repair:
- Theft, should the car not be recovered after a certain period
- Negative equity
- An accident that results in a total loss
On the other hand, gap insurance will not cover:
- The deductible owed to your standard insurance carrier
- Engine failure
- Minor repairs
- Bodily injury to yourself, other passengers and pedestrians
- Medical expenses
- Lost wages due to an accident
Who Needs Gap Insurance?
Gap insurance is not meant for every driver and could be an unnecessary expense if you provided a large down payment. As such, consider this coverage if you:
- Put less than 20 percent down on the vehicle
- Financed it for 60 months or more
- Are leasing the vehicle
- Rolled over negative equity from an older loan into a new one
- Plan to put a high number of miles on your car
- Purchased a make and model that depreciates faster than average
If you’re in the market for a new vehicle, discuss your coverage options with an Ion Insurance agent. To learn more, contact us today.