If you are in the market for a new car but don’t have a lot of ready cash and/or a decent trade in, you may want to think about gap insurance. Of course, if you are financing your purchase, you will need to carry full coverage (liability plus comprehensive and collision). Banks and finance companies require it. But since vehicles depreciate once they roll off the lot, some by as much as 20 percent, you could be upside down on your vehicle before you get around the corner.
If your car is totaled or stolen, gap insurance will cover the “gap” between how much your car is worth and how much you still owe on it. Say you are driving around a vehicle with a market value of $20,000. Since you still owe $23,000 on it, that extra $3,000 (plus any applicable deductible) is coming out of your pocket. Now gap insurance won’t pay the deductible, but it will cover the $3k.
According to the Insurance Information Institute (www.iii.org), you should consider purchasing gap insurance if you: Made less than a 20 percent down payment; Financed for 60 months or longer; Purchased a vehicle that depreciates faster than the average; or Rolled over negative equity from an old car loan into the new loan.
For a leased vehicle, gap insurance may make the most sense. Since you are not paying the vehicle off, just paying to use it (in a sense), those payments will be smaller than those for a conventional car loan. Less vehicle equity will be paid and the gap between what the car was worth new, what it is worth now, and how much you have paid on it.
As with other policy issues, your insurance professional can help you understand the nuances and basics of different coverages. They can advise you what the best coverages are in the price range you can afford. Make sure you have the coverage you need before you need it.