Understanding Automobile Gap Insurance

Collision insurance covers damage to your vehicle, but is frequently not sufficient to pay off the total amount of the car loan if you’ve been in a serious car accident involving a total loss. Many of my clients find this out the hard way after a serious accident.

In this post, we’ll explain how car gap insurance can help you save thousands of dollars in the event of you get into a serious car accident that totals your vehicle. The reason for this is that the moment you drive a new vehicle off the dealer lot, your car insurance policy is probably inadequate to protect you financially in the case of a total loss. That’s because your regular auto insurance is designed to pay the lender the vehicle’s current cash value — not the current loan balance. The difference can be thousands of dollars. Data shows that once your new car — owned or leased — leaves the lot, it is considered a used car and the value of it drops significantly. In fact, the average new vehicle loses 30 percent of its value the first year. By year three, that loss in value will be close to 50 percent, says Philip Reed, senior consumer advice editor at Edmunds.com, an auto data provider.

Isn’t Collision Coverage Enough?

Standard insurance policies – comprehensive and collision car insurance – help pay for the replacement of your vehicle if it’s a covered total loss – up to the limits of your policy and the car’s actual cash value. ACV is equal to the cost of the car when it was new, minus depreciation for age, mileage, physical condition and other factors.

After just a year, the ACV of your car can be thousands less than what you paid for it, which can leave you with an expensive loan or lease balance. Gap insurance may cover some, or all, of that amount. This coverage is available in select states and typically applies to vehicles 6 years old or less.

By the Numbers.

What’s this mean in practical terms? Let’s say your vehicle cost $25,000 new, your insurer would probably pay about $18,000 for a total loss during the first year. That’s a $7,000 shortfall. Depending on the amount of your down payment (or trade-in equity), you would still be responsible to your lender for the balance of the loan. If you have gap insurance on your auto insurance policy, your insurer pays the difference, not you.

Is Gap Insurance Right for Me?

Many lenders take the guess work out of this question, by requiring that you get gap insurance before taking a new vehicle off the lot. However, if the lender doesn’t have such requirements, there are certain circumstances where having this type of insurance is critical to protect you if you get into a serious car accident. While there is no one size fits all answer regarding the need for GAP insurance, you’re a likely candidate for gap insurance if you:

• Lease a vehicle.
  • When you lease a vehicle, often times the value of the vehicle depreciates faster than the loan balance. Under these circumstances, Gap insurance can be vital to cover the difference in a serious car accident.
• Finance for 60 months or more.
  • The longer you finance a vehicle, the more expensive the vehicle is to purchase. Given the longer period of time involved in some loans – gap insurance can be critical to have.
• Put less than 20 percent down.
  • The less you put down, the more you have to finance. This means the loan balance will remain high in the event of a total loss. Gap insurance helps clear this up in the event of a total loss car accident.
• Roll negative equity from a previous vehicle loan into a new vehicle loan.
  • If you roll negative equity into a new car, the amount is added to the total loan balance. This means that the gap caused in a total loss car accident is often larger than it would be without the negative equity.
• Drive more than the average 15,000 miles annually.
  • The more you drive, the faster the vehicle depreciates. As a result, gap insurance is particularly important in these circumstances.
• Purchase a vehicle with a history of high depreciation rates.
  • Some vehicle brands and models have a history of high depreciation rates. If you choose a car like this, it’s all the more important to protect yourself with Gap Insurance.

If you or a loved one have been involved in a serious car accident or personal injury, call the family of personal injury lawyers today at 419-900-0955 or toll free at 1-866-INJURY-0 (zero). With a combined 30+ years dealing with insurance law, we can help you navigate the often complex process of recovering the compensation you deserve.

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Sawan & Sawan is an Ohio based car accident law firm with Toledo car accident lawyers licensed to practice law in the State of Ohio. If you have been in a car accident and would like to speak further about your specific legal matter, call Sawan & Sawan today at 1-866-INJURY-0 to schedule a free consultation.