As we continue to recover from the COVID-19 pandemic, one of the things that has returned to normal is the number of cars on the road. During the pandemic, there were fewer cars on the road and many drivers often drove faster because of the decrease in traffic. Unfortunately, some drivers became accustomed to driving faster in decreased traffic, and what we are seeing now is an increase in not only the number of accidents but in their severity, as well.
These more severe accidents result in greater damage. We are seeing more total loss of vehicles than we did before the pandemic. A total loss is an insurance term that means that the cost to repair the damaged vehicle is more than its actual cash value. Combine that with another pandemic phenomenon, vehicle prices, and you have a recipe for a financial gap.
Prices for some used cars have increased by nearly 50%; the price of new cars has also gone up. As the expression goes, what goes up must come down, and when vehicle prices do start to fall, the vehicle you may have paid a great deal for may not be worth as much as you purchased it for. The result of this is negative equity or what is often referred to as being “upside-down” on the auto loan because you owe more than the vehicle is worth.
The important question to ask yourself is, “What happens if you have a car insurance claim that results in a total loss of your vehicle?” Standard auto insurance policies may only pay the current actual cash value of the vehicle. One way to help protect that difference is to purchase an optional auto loan/auto lease or gap insurance or endorsement.
What is gap insurance?
Gap insurance stands for Guaranteed Asset Protection insurance. It is an optional coverage you can purchase on your auto insurance policy that can help cover the difference between the loan balance and the vehicle’s actual cash value.
How does gap insurance work?
Let’s walk through an example of how gap insurance could work.
Your car is two years old, and its actual cash value is $15,000, yet you purchased the car for $25,000 and still owe $21,000 on the loan. By calculating the difference between $21,000 and $15,000, you see there is a financial gap of $6,000. If you have gap insurance, it can help cover the difference in the event you have a total loss, minus the policy’s deductible.
It is important to understand that having gap insurance doesn’t mean that your insurance provider will write you a check for what you originally paid for the car. Having this coverage means that your insurance company may pay for the financed amount you currently owe on your vehicle at the time of your unexpected accident, minus the deductible on the policy.
What does gap insurance cover?
Gap insurance coverage is for any unpaid amount due on a lease or loan that is above the vehicle’s actual cash value. There are some exceptions, such as overdue payments, security deposits, lease penalties, warranties and carry-over balances from previous loans or leases.
Do I need gap insurance?
When determining whether to purchase gap insurance for your vehicle, there are a few things to consider. If you owe more on your vehicle loan than it may be worth, there may be a gap when you calculate the loan balance and compare it against your vehicle’s actual cash value. If the difference is significant, it would be smart to consider purchasing gap insurance.
Other reasons to consider purchasing gap insurance include:
It is always important to talk to your local insurance agent who can help you determine your insurance needs.
How much does gap insurance cost?
The price of gap insurance can fluctuate depending on your auto insurance premiums. Gap insurance may be cheaper than you think. The important part is that it could be much cheaper to pay for gap insurance rather than having to pay off the balance of the auto loan.
How do I buy gap insurance?
You can add coverage to your auto insurance policy by visiting a local insurance agent.* These insurance professionals can walk you through your policy and explain why it may be a good idea to purchase this type of coverage for your vehicle.
This coverage must be added at the time the vehicle is purchased and remain on the policy until the Loss Payable or Lessor is removed.*
A second option is to find out if your auto dealer or financing company offers gap insurance. Some auto dealers offer this type of coverage, but it is always smart to compare the price and details of the coverage and the provider before securing such coverage from an auto dealer at the time of purchase.
It is always important to understand your insurance coverage. When in doubt, reach out to an insurance professional.
*Conditions and limitations apply, please contact your Indiana Farm Bureau Insurance professional for more information.