Standard car insurance policies typically provide coverage for physical injuries, property damage, and other people’s vehicles. If you want coverage for your own car, you’ll need collision coverage and comprehensive coverage. Collision insurance provides coverage for your car should you hit another vehicle or an object such as a light pole. Comprehensive insurance, on the other hand, covers damage from weather, falling objects, fire, vandalism, etc.
Both of these can be great policy additions for any car that’s worth at least a few thousand dollars.
Still, if you’re driving a brand-new vehicle that you’re making monthly payments on, collision and comprehensive coverage may not be enough. Depending on how much you paid up front, along with the depreciation rate of your vehicle, you may want to include gap insurance on your policy as well.
Car Depreciation and Gap Coverage
As you probably know, new vehicles lose their value pretty quickly. As soon as you drive it off the lot, it loses about 10% of its value. Within its first year, it will likely lose 15-20%. Within five years, it may be worth just 40% of the original price. Depending on the size of the down payment, as well as how much you pay per month, you could find yourself upside down on a new car.
That means even with full comprehensive and collision coverage, you could end up owing more money to your lender than you receive from your insurance provider if you total your car. This is a very bad spot for anyone to be in. Not only do you not have a car, but you’re still forced to make your monthly car payments on the car you no longer have.
This is where gap insurance comes into play.
Gap coverage fills in the “gap” between what you owe and what your car is worth. So, let’s say you bought a car for $30,000. A few years later, you total the car. At this point, the car is only worth $15,000. Unfortunately, you still owe $16,500 on it.
A collision policy should provide the $15,000 that your car is currently worth. A gap policy would then provide coverage for the remaining $1500. Though you don’t get to keep any of this money, you can at least be debt free while you shop for a new vehicle.
When Do I Need Gap Coverage?
Gap insurance is only available for people who are the original loan holder or leaseholder on a vehicle. In the case of a lease, your dealer will likely require you to include gap coverage on your policy. Even if you’re not required to have it, it can be very beneficial for people who made smaller down payments and/or are paying back their own over a longer period of time.
Ultimately, a little math can go a long way in determining whether or not gap insurance is worth it for your situation. We can help with that.
At Link Hellmuth, we work with our clients to create insurance policies that meet their needs. We then shop around to different providers to find the best price possible. With Link-Hellmuth at your side, it’s never been easier to find quality, yet affordable car insurance in the Springfield area.
Contact us today!