Is gap insurance worth it?

What is Gap Insurance?

You may know that a new car’s value starts to drop as soon as you drive it off the lot. Now, let’s say you take out a loan for your car, buy a new vehicle, and drive it home. Its value drops so quickly that the current resale value is less than what you owe on it – by several thousand dollars.

Now, suppose that one month after the purchase, another driver crashes into your new car, totaling it. Your insurance will pay you the actual cash value of the vehicle, which is several thousand dollars less than what you owe on the loan. How will you cover the difference?

This is where gap insurance comes in. Gap insurance pays the policyholder the difference between the actual cash value and the amount owed on the loan.

When Do You Need (and When Don’t You Need) Gap Insurance?

Not everyone who experiences a stolen or totaled car needs gap insurance. It only benefits those who finance their new car purchase – and only for the period during which their car’s value is less than what they owe on the loan. This is known as being “upside down” on the loan.

This period can be very short or surprisingly long, depending on one or more of the following factors:

• The make and model of the purchased car: All new cars depreciate significantly in the first few months after purchase, but some lose value faster than others.
• Long-term loan: When you take out a car loan that exceeds 36 months, your monthly loan payment will be lower, but you will pay more over time. In this case, there will be a longer period when the actual value of the car is less than what you owe on the loan.
• Not putting much or any money down, and borrowing more than the purchase price: The more debt you incur upfront, the longer the “gap” will exist.

Like any other coverage, you should shop around to find the best deal available.

What Does Gap Insurance Cost, and Is It Worth It?

While you may not be excited about the idea of buying an optional type of insurance, it may be worth it, depending on your situation.

Fortunately, gap insurance is not very expensive. The typical gap insurance premium is calculated based on the comprehensive and collision insurance premiums in the policy, and it usually costs about 5% or 6% of that cost.

Here’s an example of a policy with a total annual cost of $1500. The comprehensive and collision portions of this total amount to about 30% to 40%, or $450 to $600. Taking 5% or 6% of that means an additional cost ranging from $22.50 to $36 on your insurance premium for gap insurance. That is the total for an entire year. However, the cost of gap insurance provided directly from car dealerships can be much higher. One should research thoroughly to find the best deal and consider dropping coverage when the car loan balance is less than the value of the car.

Remember two other things: First, as your car’s value decreases, the cost of comprehensive and collision insurance will also decrease, as will the cost of gap insurance. Second, once you reach the point where you no longer owe more on your car than its current value, you won’t need gap insurance anymore, and you can cancel it.

Before purchasing gap insurance, it’s worth doing the math to see how beneficial gap insurance would be for you. If you’re only slightly upside down on the loan, it might be better to simply save the money in a savings account in case you ultimately need gap insurance.

If
You ended up saving money for the possibility of gap insurance; the worst-case scenario is that you pay the amount you’ve already budgeted. In the best case, nothing happens to your car, and you can keep the money.

Why is gap insurance so cheap?

Gap coverage is very cheap because claims against gap policies are rarely filed, which lowers your premium costs and those for everyone.

Gap insurance, unlike regular insurance, covers a very specific amount of money – your loan amount minus the amount your car is worth – for a very specific period of time (until that number becomes zero or negative).

So, is gap insurance worth it? This isn’t a decision for us to make for you. But if you’re buying a new car and don’t have a lot of extra cash while your loan is underwater, you should seriously consider gap insurance.

Source: https://www.thebalancemoney.com/is-gap-insurance-worth-it-527218