If you loan or lease your vehicle, it’s probably a smart idea to take a look at gap coverage. It often isn’t included with your average auto policy, and having it can potentially save you thousands of dollars.
Gap insurance covers the difference between the depreciated value of your car and how much you owe on a loan at the time of an accident. So to understand gap coverage, you first need to understand depreciation.
What is depreciation?
As soon as you drive a new car off the sales lot, it instantly loses value, or depreciates. While the depreciation rate depends on the year, make and model, on average, your car is worth 20% less than the original value just one year after you’ve purchased it. And within the first five years, most cars lose 60% of their original value.
This means that if you’ve taken out a loan, you may owe back more money than your car is worth.
Enter: Gap coverage
Got it so far? Okay, here’s how it works: If you get into an accident and your car is damaged beyond repair, your average comprehensive and collision policy will only cover the depreciated value.
So imagine that you take out a loan and purchase a new car. Then, one year later, you get into an accident that’s deemed a total loss. Your insurance will cover the depreciated value, which might be 20% less than what you paid for the car. However, you still owe more on your loan than what your auto policy will cover. Now, you’re stuck making payments on a car that you can’t even drive.
Gap coverage protects you by covering the “gap” amount between what your insurance covers and what you still owe on your loan.
Talk to your independent agent
Now that you’ve got the basics down, your independent insurance agent will fill you in on the rest, like coverage limits and requirements.
There are also some instances in which you may already have gap insurance coverage. For example, if you’re leasing your car, gap insurance may already be included in your contract and your lease payments.
Your independent agent will be able to help you navigate through your auto policy and can help you make smart decisions when it comes to gap coverage.
Please contact your McMichael Insurance agent for complete details on coverages and discounts. If the policy coverage descriptions in this article conflict with the language in the policy, the language in the policy applies.
-Kelley Blue Book
-Department of Motor Vehicles
-Insurance Information Institute
Thanks to Grange Insurance for providing the information in this blog post. At McMichael Insurance, we are proud to offer coverage from Grange Insurance. An insurance carrier rated A+ by A.M. Best.