Appropriate car insurance is a valuable investment. While you need a certain amount of coverage to drive legally in Clarksville, Maryland, additional insurance options provide extra coverage and protection from situations that could be catastrophically expensive. Gap insurance is one such option.
What Gap Insurance Is
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Gap insurance is a type of automobile coverage that compensates you for the difference between what you owe on your vehicle and what your vehicle is worth if it's stolen or totaled. This insurance differs from other types of coverage because it provides for a sum above and beyond the car's actual cash value.
Actual cash value (ACV) is what your vehicle is worth after taking mileage, age, and damage into account. To determine the ACV for your vehicle, subtract its depreciation from its replacement value. This amount is very close to the car's trade-in value.
Insurance companies use ACV to determine whether a car is a total loss after an accident. If the cost to repair the vehicle exceeds the ACV, the company deems that vehicle totaled, and standard insurance will only compensate you for the vehicle's value rather than the repairs.
Some states consider a car to be a total loss if the repair costs exceed a percentage of the ACV. For example, in Maryland, your car is totaled if the repair costs are just 75% of the ACV.
How Does Gap Insurance Work?
Gap Insurance covers the gap between what you owe on your vehicle and what your insurance will pay you for it. For example, say you put $2,000 down on a brand-new car and take out a $23,000 car loan to cover the rest. With a 60-month loan and a 6.6% interest rate, you'll pay $451 a month, or $5,412 a year on your car. Over the life of the loan, you'll actually pay $27,066 for the vehicle.
After you drive off the lot, your $25,000 car has depreciated by 10%, so it's now worth $22,500, but you still owe $27,066. After the first year of ownership, your vehicle has depreciated 20% to a value of about $20,000, yet you owe $21,654.
If your vehicle gets stolen or totaled during this time, your standard insurance plan will only compensate you for the car's value, potentially leaving you with thousands of dollars outstanding on your loan and no car to show for it. Gap insurance steps in and covers that amount, paying off your loan so you're free from that debt as you look for your next vehicle.
Who Needs Gap Insurance?
Gap insurance is designed for individuals who owe more on their vehicles than they're worth. As you can see from the example above, the instant depreciation of a new car once driven off the lot puts many drivers in that category as soon as they take their vehicles home. You should consider gap insurance if:
- You put down less than 20% of the purchase price as your down payment.
- Your car loan lasts for 60 months or longer.
- You're leasing a vehicle.
- You're driving a vehicle with an exceptionally high depreciation rate.
- You drive more than 15,000 miles a year, accelerating your car's depreciation.
If one or more of these statements applies to you, you can calculate the difference between your car's value and what you owe on your loan to see how much value gap insurance offers in your case. Compare this with the cost of the insurance itself to see how much you might gain from this coverage.
How Can I Get Gap Insurance?
You typically need to get gap insurance within 30 days of purchasing a new vehicle. If you're leasing your vehicle, the contract might already include gap insurance, so check the fine print to see if you're covered.
Not all insurance providers offer gap insurance, so you might need to shop around for this special type of coverage. It's typically best to begin by contacting your current insurance agent to find out what they can provide. If gap insurance isn't an option, you can purchase this coverage separately or move your car insurance plan to a company that will meet all your needs.
The bank or credit union that's financing your vehicle might also offer gap insurance. In this case, the lender usually calculates the total sum for your gap insurance and adds the cost to your auto loan. While this seems convenient, it means you're paying interest on your gap insurance, which increases the overall price of your coverage.
When Should I Cancel My Gap Insurance?
You should cancel your gap insurance when the amount you owe on your vehicle is less than the vehicle's ACV. Once a year, look up the trade-in value of your vehicle or have it appraised at a dealership. Then, look at your car loan and determine what you still owe on the vehicle. The difference between these two numbers will help you decide if it's worth investing in gap insurance for another year. If the cost of the gap insurance itself exceeds what the insurance would pay out for you, it's no longer worth the investment.
What Exclusions Apply to Gap Insurance?
Gap insurance offers helpful coverage in specific situations, but it's important to know what it does and does not cover. Gap insurance will not help with:
- Late loan payments.
- Damage costs associated with a previous accident that did not total the car.
- Insurance deductibles.
- Financial penalties assessed on a leased vehicle for excessive use.
- Security deposits on leased vehicles.
- Costs associated with extended warranties or other coverage.
- Carry-over balances from previous loans.
- Equipment added to the vehicle after it was purchased.
If you're leasing or purchasing a new vehicle from Koons Clarksville Chevrolet GMC, gap insurance is definitely something to think about. Calculate how much you can afford to spend each month on car expenses, including insurance, using our convenient payment calculator. Then get the right coverage for your needs, so you can drive off the lot confidently in your new vehicle.
