We’ve all heard the cliché that a car’s value plummets the second you drive it off the lot. But there is a type of insurance designed specifically to protect owners of depreciating cars from being left out of pocket – gap insurance.
What is gap insurance? It is a form of additional protection that safeguards vehicle owners in the event of a car accident or auto wreck. But it is not without its issues. Gap coverage can be complex, and problems can arise both during a car crash claim and through purchasing the gap plan itself.
This article will explore gap insurance in detail to ensure vehicle buyers have the information they need to purchase protection with peace of mind and car accident victims know their rights after a crash.
Gap insurance is a type of coverage used to make sure you are fully compensated in the event of a vehicle accident.
When a car is stolen or totaled in a serious auto accident, the owner will receive a payout through their regular car insurance coverage for the vehicle’s current value.
However, due to the rapid depreciation in the value of cars, trucks, motorcycles, and other vehicles, this payout will often not cover the lease gap or the amount left on a vehicle loan. In this situation, gap insurance covers the shortfall.
We will cover how gap insurance works in much greater detail below.
The term ‘gap insurance’ has a dual meaning. Most people believe that the name describes the gap between what you owe on the loan and the vehicle’s current value. But the name is an acronym for Guaranteed Asset Protection.
Here’s a detailed breakdown of how gap insurance works, showing exactly why it can be a vital purchase for new car owners:
An example of gap insurance at work:
➤ You buy a car for $30,000, and the car is totaled in an accident less than one year later.
➤ The value of your car (due to depreciation) is now $27,300, which is the amount your car insurers give you.
➤ But there is still $28,500 left on your loan.
➤ Gap protection will provide an additional payout covering the difference of $1,200.
According to California law, it is mandatory to have basic vehicle insurance. This protects you and the other drivers on the road in an accident. But there is no such requirement for finance gap insurance.
There is sometimes an exception; some lease contracts require a driver to have gap protection. In all other situations, it is completely optional.
While drivers are not required to purchase gap coverage by law, many still decide to purchase the extra coverage. But is gap insurance worth it?
As always, the answer is not black and white. It varies depending on the circumstance.
Purchasing gap insurance could be worthwhile if:
These factors could all contribute to the remaining value on a vehicle loan significantly exceeding the value of the car, truck, or motorcycle.
The graph below shows the average rate of car value depreciation, based on a car bought new for $40,000. This shows the changing value each year.
The grap shows just how quickly the value of your vehicle can plummet once you drive it off the dealer lot. The same information is displayed in the table below, along with the falling percentage of original vehicle cost per year.
| Age of Car | Value of Car | % of Original Value |
|---|---|---|
| New | $40,000 | 100% |
| 1 Month | $36,400 | 91% |
| 1 Year | $32,400 | 81% |
| 2 Years | $27,599 | 69% |
| 3 Years | $23,200 | 58% |
| 4 Years | $19,600 | 49% |
| 5 Years | $16,000 | 40% |
| 6 Years | $12,000 | 30% |
| 7 Years | $10,000 | 25% |
| 8 Years | $8,000 | 20% |
| 9 Years | $6,000 | 15% |
| 10 Years | $4,000 | 10% |
It is the rapid rate of lost value that creates the need for gap insurance. It can cause a large gulf between the remaining loan amount and the car value, as the vehicle value drops quicker than most people can pay down their loan. The statistics show:
If you are looking for information on where to buy gap insurance and how much gap insurance costs, we have you covered.
You may be able to purchase gap protection from several sources, including dealerships, vehicle loan finance lenders, and insurance companies.
Insurance Company: The best option is often to add the new coverage through your existing firm if it offers the option. This is the simplest (and usually the cheapest) way for vehicle owners to make sure they are fully covered.
Most companies offer some form of gap insurance, at an average additional cost ranging from $20-$80 per year. For example, Progressive offers gap services for as little as $5 per month. Ask your insurance firm for a quote first.
Car Dealership: A car dealership sometimes gives buyers the option of purchasing extra coverage for a one-time payment. However, this is often less appealing because it will be a larger sum to pay in one go – on average, between $500-$1,000.
Loan Providers: Vehicle loan lenders often provide gap coverage for a monthly payment, which can be added to your monthly loan repayment. However, buyers should beware; through this method, you will pay interest on your gap insurance.
Gap insurance is an important form of coverage because it protects owners from financial problems if they are involved in a crash. However, while it provides a vital form of protection, it is not without issues.
There are instances in which the vehicle owner opts for an alternative source, instead of purchasing gap coverage from their insurance company. This can sometimes lead to problems.
When it comes to securing gap insurance coverage through dealerships, there are significant risks. This coverage is largely unregulated, and some shady dealers sell forms of gap protection without being licensed to do so. Other issues are caused by dealers purchasing gap coverage through an insurance company and then selling it at a massive price mark-up by pressuring the buyer.
Other gap protection issues might include inaccurate vehicle valuations, or other problems arising after a car accident. No matter the circumstances, it is best to handle a gap insurance claim with the help of a legal professional.
An experienced car accident lawyer or personal injury attorney who has extensive knowledge of the legal system will be able to ensure that contracts are upheld, vehicle evaluations are done lawfully, and accident victims are made whole.
Contact Bisnar Chase for more information on auto accident lawsuits and gap insurance claims. Call (800) 561-4887. Check out our resources to answer other car accident-related injury questions or view the value of your personal injury claim.
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