Do I Need Gap Insurance?

Before finding out whether you need it, one thing is usually clear; if your car insurance policy allows you to add it, do not buy Gap from the lender or dealership. We are often shocked when we see our clients show us a charge for Gap for $400 (or more) especially when there is absolutely no need for it. It only costs a few dollars to add Gap to your current auto insurance policy and the best part is that once you no longer need it – usually within the first few years – you can stop paying for it. The difference is usually hundreds of dollars.

When You Should Consider Gap Insurance

GAP is not required by law and we have never seen it required by a lender. If a dealership tells you something different, we would recommend you finding another dealership.

Gap insurance pays for the difference in what the insurance company is willing to pay based on the vehicle’s value and the loan balance. If, for example, you by a new car for $40,000 and put down $1,000, you pay off a balance of $39,000 over time. The moment you drive the car off the lot, the value of your now “used” car, could drop anywhere from 5-30%+. If you total your car on the way home from the dealership (or months later), you are shocked to find out that the insurance company is only willing to pay – let’s say – $33,000 for it.

This often upsets insurance clients and some insurance companies have responded by advertising New Car Replacement or similar options. It’s important that these are extra features that you need to pay for. What clients simply need to understand is that an insurance company needs to pay for the value of the vehicle at the time of loss just as if you tried to sell your recently purchase vehicle. So if you find out that you cannot afford your monthly payments and decide to return the car to the dealership, they would most likely only offer you as little as $30,000 since trade-in values are usually lower than private party values. Insurance companies base a vehicle value closer to the private party value.

Below is an example of how your payout will differ after a total loss:

Product
Total Loss Without Gap Insurance
Total Loss With Gap Insurance
Total Sales Price$40,000$40,000
Down-Payment$1,000$1,000
Amount Financed$39,000$39,000
Vehicle Value$33,000$33,000
Deductible$500$500
Insurance Pays$32,500$38,500
Your "Gap" (out of pocket cost)$6,500$500 (deductible only)

How Gap Insurance Works for a Leased Car

In many cases, since lease payments are usually lower compared to buying the car and because all new cars depreciate the most in the first few years, the market value of the leased vehicle is usually much lower than what is still owed on the lease contract. Even if you are leasing a vehicle, you are still responsible for the difference between what the insurance company will pay and what is still owed on the lease.

Before adding lease/gap coverage to your auto insurance policy, find out if the coverage is already included in the lease agreement. If it is included, find out how much it costs and compare it to what your auto insurance policy quotes you. In most cases, lease gap coverage that has been added to the loan is more expensive than similar coverage provided by your insurance company.

When do I NOT need gap insurance?

If you are purchasing a new or slightly used car, the need for gap insurance primarily depends on the amount you paid down. While there is no perfect formula, you will probably face a “gap” for the first few months or years of paying off a loan or lease if you paid less than 30% down. With low interest rates, many clients choose to pay down as little as possible. Keep in mind that if you pay a larger percentage down on a new vehicle, your insurance policy will still only pay for the value of the vehicle at the time of loss so you could lose out on a big part of your down-payment. In that case, you may want to consider a new car replacement option.

Gap insurance also becomes unnecessary if you traded in a vehicle that equaled to a significant down-payment. So in the example of the $40,000 vehicle above, if you traded in a car that paid down $8,000, you will most likely not need GAP coverage.

Please do not hesitate to call us at 425-242-5252 before or shortly after you have purchased a vehicle. Even if you added Gap coverage to your loan, you usually have at least a full month to request a full refund.

 

DOMINIK KUNIGK

President
1500 Benson Road South, Suite 201
Renton, WA 98055
Office: 425-242-5252
dom@dokagency.com

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