(And how you can avoid it.)
Here is the typical scenario. You choose the car you want to purchase, get the finance agreement pitch, and then move to discussing extras like gap insurance. The usual pitch is cloaked in terms of urgency, but the underlying narrative tells a much different story.
You see, car dealerships profit like bandits off gap insurance. Because gap insurance is not regulated, the commissions have no limits. Dealerships can charge whatever commissions they want. That's money you're putting right into their pocket just for the privilege of letting them sell a gap policy to you.
The reason most customers fall for the sales pitch is simple. They assume that the dealership is the only place to purchase gap insurance.
While this is certainly false, the dealership won’t mention it, because they want to make the extra commission. Don't fall for this. There are other places to purchase gap insurance for much less money.
You could purchase this coverage from other sources, like lenders or credit unions, and pay less, but the best place to find a great deal on gap insurance is your auto insurance company. Local agents can find a price that is significantly less because they shop around for the best price, which can sometimes be as little as $20 per year.
This is why it is always best to talk to your independent insurance agent before making any decisions. They have industry insight and experience and can help you make informed decisions.
How to Benefit from Gap Insurance Coverage
So what do the above scenarios tell you? It's more than worth it to consider purchasing gap insurance from anywhere but a car dealership. There is really no reason to roll the gap policy into your dealership finance agreement, since you typically only need to get protection for a few years.
Gap insurance is a wise choice in any of these circumstances:
- You are purchasing or leasing a new or slightly used vehicle.
- You are buying a vehicle of significant value.
- You are financing a new or used vehicle without a large down payment, creating a gap between your vehicle’s actual value and your loan amount.
- You do not have significant cash savings that would allow you to cover the difference between the amount you owe on your loan and the actual cash value if your car is stolen or totaled.
As with most types of insurance coverage, everything comes down to your risk. If you are buying a car, gap insurance will most likely be optional, and you get to decide. Do you want to avoid the possibility of a large financial burden if something bad happens to your car, or are you willing to take that risk?
Industry statistics show that new vehicles lose about 28% of their value in the first year after purchase, and 7% the second year. As a result, car owners can end up being upside down on their loan: The value of the automobile is less than the loan amount.
This makes gap insurance a wise investment if your vehicle is damaged or stolen within that time frame. That's a benefit you cannot argue with.
Yet, to purchase the best policy and get the most benefit, you should always talk to an independent insurance agent to help you decide whether gap insurance is worthwhile, based on your circumstances.
How Does Gap Insurance Work?
Gap insurance covers the gap between what your vehicle is worth and what you are actually on the hook for in regard your vehicle loan after a collision. Does gap insurance cover theft? Absolutely. However, typically there is a waiting period (30 days or so) after the claim is filed.
This leaves time for your vehicle to be recovered. If that occurs, then your standard insurance coverage activates. It is important to reiterate that gap policies are typically only needed for a specific period of time.
Once the market rate of your vehicle plateaus and comes in line with current market rates, a gap policy is no longer needed. However, since the decrease in vehicle value is so drastic in the beginning, gap insurance is a worthwhile investment.
It works like this. Let's say you purchase a vehicle brand-new for $35,000. The moment you drive it off the lot, the value drops. Then, it may only be worth $27,000. If you are in an accident, your auto insurance will pay the replacement cost of the vehicle, or $27,000.
The policy specifies that they must fulfill the obligation of replacement at current market value. It has nothing to do with the loan value of your vehicle. You are still $7,000 short. Gap insurance would make up the difference.
The cost of gap insurance will vary depending on a number of factors, including the value of your car. Did you just buy a new Jaguar or a Mitsubishi? Are you leasing a new hybrid car? At an average rate of just $20 per year, it is most likely worth the extra insurance expense if your car’s loan amount significantly exceeds its value.
Another factor that will affect your gap insurance cost is the auto insurance company you choose. Not all insurance is the same, and prices can vary dramatically from one insurance provider to the next.
Working with an independent agent who can compare prices and options from multiple companies will help you find the best coverage and price.
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Getting the Best Deal on Gap Insurance
It is important to keep in mind that not all auto insurance coverage is equal. Therefore, it is in your best interest to work with an independent insurance agent to make sure you purchase a policy that best suits your needs.
You will get a much better deal than if you purchase a policy from a dealership. Contact an independent insurance agent today to make sure you purchase the right gap auto coverage policy.
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