Gap insurance. Ever heard of it? I hadn't until I needed it. After being involved in an accident that totaled my two-year-old car, I discovered that I was missing the most important type of insurance I could have purchased--gap insurance.
This type of insurance covers the difference between what the insurance company says your car is worth versus what's left on your loan. When you're buying a new car or even a newer used car, this type of insurance policy is essential. Otherwise, you may find that you have several thousand dollars to pay off from your other car loan.
When you drive your new car off the lot, it will likely depreciate between 20% and 30%. If your $20,000 car depreciates just 20%, you may be out $4,000 if you have an accident as you pull out of the lot. Without gap insurance, you'll have no protection nor any way to get back the money you will lose .
Generally, gap insurance is available for a reasonable price. It can cost anywhere from $100 to 4% or 5% of the sticker price. Shop around for rates and quotes before making any decisions. Learn why one policy is more expensive than another - if there's a better policy with another insurer, consider making the change.
- Check with Your Current Insurer: Talk to your current insurer about the availability of gap insurance. Usually, the policy will cover both theft and accidents, but be sure to read it carefully. If you can't get a policy from your current insurer, you may want to consider finding a new insurer or an older vehicle.
- For Older Vehicles: If the car is not brand new, you may not be able to get gap insurance. Talk to your insurer, though, since some companies are willing to offer a policy for any car, or at least newer cars.
- For Leased Cars: Generally, the lease will include gap insurance, but don't count on it. If you are leasing a car, you should read the document very carefully to check on all the terms. NEVER lease a car that doesn't include gap insurance in the lease. If the car is totaled, you'll owe the balance of the lease, often payable immediately.
- The Dealer's Offer: When you purchase your car, the dealership will probably try to talk you into adding a lot of extra bells and whistles. One of those will probably be gap insurance. You can talk to the car dealership about purchasing a policy, but it will likely cost a lot more than if you bought the same coverage through your current, or future, insurer.
If you're buying a new car or leasing a car, gap coverage is not an option; it's a requirement. You simply can't afford to risk your money by neglecting to get this type of coverage. Otherwise, you may discover that you're without a car and money to buy a new one when the repair bill rolls in. If you have a newer used car, do your best to find a policy or choose a car that won't depreciate as quickly. Trust me, if you ever need the coverage, you will be glad that you went ahead and paid for it.