Courtesy of iii.org
How gap insurance works
When you buy or rent a new car or truck, the vehicle starts to deteriorate in value when it leaves the car lot. In fact, most cars lose 20 percent of their value within a year. Standard car insurance covers the depreciated value of a car – in other words, a standard policy pays for the vehicle's current market value at the time of the claim.
If, when you finance the purchase of a new car and make only a small deposit, during the first years of ownership of the vehicle, the loan amount may exceed the market value of the vehicle.
In the event of an accident in which you have seriously damaged or totaled your car, gap insurance covers the difference between what a vehicle is currently worth (which your standard insurance will pay) and the amount you actually owe on it.
When you may need gap insurance
for your new car or truck purchase if you:
- Made less than 20 percent payment
- Financed for 60 months or longer
- Rented the vehicle (insurance contract is usually required for a leasing)
- Bought a vehicle that is depreciated faster than average
- Rolled over negative capital from an old car loan to the new loan
Where you can get a gap insurance
Your car dealer can offer to sell your gap insurance on your new vehicle. But most car insurance companies also offer it, and they usually charge less than the dealer. Most car insurance policies, including gap insurance with collision and comprehensive coverage, add only about $ 20 per year to the annual premium.