Not long ago, people all over the mid-Atlantic were dumbstruck when a derecho whipped through almost a dozen states, leaving hurricane like destruction in its path. One man had just bought his wife a brand new Mini-Cooper just a few months prior, and he himself had just bought himself a brand new vehicle a year ago too. The night of the windstorm, a tree took out both the vehicles that were in his driveway, flattening them like a pancake. While talking to him, it was pointed out that at least the super tall tree hadn’t fallen just slightly to the right and hit their house. He responded that he had almost wished it had hit the house, explaining that now he would have to spend $20K to pay off the loan on his wife’s new Mini-Cooper versus simply paying a deductible on a homeowners insurance claim.
Unfortunately, if he had purchased GAP (Guaranteed Auto Protection) insurance, he wouldn’t be facing that situation.
When it comes to automobiles, depreciation is a fact of life. Unless you own and insure a classic or antique car which becomes more valuable daily, your car depreciates dramatically beginning the moment you drive it off the lot—that’s a verified statistic, not just an old wives’ tale.
The Automobile Association of America states that cars can depreciate anywhere from 10 to 20% the moment it leaves a dealership. Then, every day you drive your new car, it becomes less valuable and it takes some time to pay enough on a loan so that it’s lower than what you owe on the car.
Because of depreciation, there are many individuals who seek to buy what is called “GAP insurance” when they purchase a new car. GAP insurance for your vehicle is made to close the “gap” between the amount of money owed on your new car and the amount of money the insurance company would pay if the vehicle were involved in an accident serious enough to be a total loss.
Of course, even if you have full comprehensive insurance, the insurance company will pay only the current market value of the vehicle and not the full amount of money left owing on the loan. As buyer, you would be responsible for paying the entire amount of the loan, regardless of what amount your insurance company pays. This could amount to many thousands of dollars. It is no wonder that people increasingly feel that gap insurance is essential.
Imagine that you just bought a new vehicle for $25,000. Your neighbor’s tree falls and flattens your car three days later (which is exactly what many experienced in the mid-Atlantic last week). Through a little BlueBook research, you ascertain the value of your vehicle is only $20,000 even though it’s only been yours for a matter of hours. But your bank wants the full $25,000 plus interest. Now, you wish you’d bought GAP insurance.
Most often, GAP insurance is offered by the dealer at the time of purchase as a part of the loan agreement. As you can see from the example above, this is an option you will certainly want to consider. Like many other potential risks for which we insure ourselves, this expense could become a very real one which may set you back from your financial goals for years to come. Generally speaking, and considering the alternative, although GAP insurance will add some onto your premium, the coverage is not expensive that expensive, sometimes being added as a flat rate, and sometimes being calculated as 5% of what your physical damage coverage (comprehensive and collision coverage) are. Overall, GAP insurance will probably not significantly affect your monthly payment, and making slightly higher monthly insurance payments is a far cry from writing out a $20K check on a brand new car that’s been totaled.
Of course, unless your loan requires it, you are not forced to buy GAP coverage at all. If you want the insurance, and if you prefer, you may seek gap insurance elsewhere. Take the time to meet and visit with your insurance agent prior to your purchase, he or she may be able to offer you options which will save you money and cover you equally well. As often happens, your insurer may be able to provide this insurance as part of a “bundle” which includes other policies and for which you may receive a discount.
Whether you choose to obtain your GAP insurance directly through an insurer or through the financial institution providing your loan, it’s important to know that policies written by insurance agents are regulated by your state’s insurance laws. Policies provided by financial institutions are not.
Once again, it pays to learn all you can about your insurance coverage. By studying your plans and your future needs, your insurer will be in a position to provide you with the best possible protection for all your assets. From your car to your lawnmower, your insurance agency has alternatives to insurance coverage offered through dealerships and manufacturers and can be a source of great security and savings in the long-term.
However, that is not to say that you have to accept the dealership’s offer. Although the GAP insurance they provide may be a low cost, you may still find additional savings by shopping around for better deals on the premiums through private insurers and often online.
Everyone likes to believe they’d never need such insurance, but unfortunately, with today’s market and the quickness at which cars depreciate, it’s not worth the gamble.
Over a week ago, thousands of people across the mid-Atlantic had no idea there cars would be flattened by trees on an unsuspecting Friday night from a windstorm no one really saw coming. Now, many of them are unfortunately having to write checks to pay off auto loans not covered by their insurance. If you consider GAP insurance just for a little while until you owe less than the car is worth, you could be avoiding a huge gap in your checking account