Gap insurance - do you need it?

If your family is like one of those shown on many car commercials during the holidays, you got a new car! Congratulations.

As we start our new year off on icy Bellingham roads, it pays to keep in mind that cars aren't toys, even if Santa brings them. Drive safely. Here's what you need to know about insuring it so you're not left with a big bill if your car is totaled in an accident. 

Most likely you have the recommended and/or required liability, collision, and personal injury protection already. And you've already made sure it's got you covered for accidents, acts of nature, and just about anything else life can throw our way. If you have financed a new, near-new, or leased car, hopefully someone has told you about gap insurance. 

Insurance policies are intended to "put the insured in as good a position as he or she would have been but for the accident" according to this Nolo article. In the real world, this means that if you have an accident, then your policy would cover the real cost of repairs and expenses that came from it. Regardless of whether you are collecting under your own policy (for example, collision coverage) or the at-fault driver's liability policy, insurers will base your compensation on the value of the vehicle at the time of the collision. 

However, the trick with new and leased vehicles is that the moment they're driven off the lot, they decrease quite suddenly in value. This is called depreciation. Most things depreciate over time, and cars are one of the worst culprits. In one example, the average car purchased new will be worth 25% less just one year later! No matter if it's as good as new. Therefore, if you're in an accident in which your vehicle is totaled, you will have more to pay on your loan or lease agreement than the amount of money you will receive from your claim. 

The Nolo article describes a good example of this issue:

Say that you financed a $20,000 car at 6% for 48 months, with zero-dollars down. The total amount you owe under the loan is $22,545.60. If you car was totaled on the one-year anniversary of your owning it, you’ve paid a total of $5,636.40; however, since you owe the full amount you contracted for or agreed to under the loan, you still owe $16,909.20. The most you’re going to receive for the car is $15,000; the insurer may well propose paying less, such as if you had driven more-than-typical miles, had previously been in a minor fender bender, or had anything which would reduce the value of your car from its optimal depreciated value.

Now you're at the mercy of whatever your insurance adjuster thinks about the condition of your car. And here's a quick, painfully funny video link on how adjusters are notoriously stingy at assessing value of damages and losses incurred from an accident. Imagine how it would feel to be paying a couple thousand dollars just to pay off a loan on a vehicle that will be mashed up at the junk yard. 

You're not off the hook with a leased vehicle, either. Especially early in the lease - when that gap tends to be the widest anyway - you're paying off a lot of interest and not making much of a dent in the principle. And with luxury cars, this gap is even wider.

So what do you do?

This is where gap insurance comes in. It insures that gap so you don't have to pay it. You probably had an opportunity to buy gap insurance when you signed the loan or lease, but if you declined, you can add it later by contacting your insurance company. Do the calcuation to find out what your car is worth at Kelly Blue Book, then take a look at the payoff amount that should be located on your loan or lease billing statement. If that gap is too wide for your comfort, consider buying a little peace of mind. Last but not least, it's hard to walk out of any wreck where a vehicle is totaled and not have some injuries. See your doctor, and consider calling Bill Coats Law for a free consultation on next best steps to take. 

 

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