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5 tips for buying gap insurance for your new car

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CarInsurance.com

Woman smiling buying new carMany people don't realize that when they are car shopping, they might need to be in the market for gap insurance, too. New car purchases and gap insurance go hand-in-hand, yet many drivers don't know what it is or misunderstand its reach. So if you're buying a new car soon, it's best to know about gap insurance before you head to the dealership.

"Many car owners believe gap insurance is a catch-all policy that makes their car payments anytime they're unable to," says Penny Gusner, the consumer analyst for Insure.com. "That is not the case."

Gap insurance protects you if your vehicle is totaled or stolen and you owe more than it's worth to your lien-holder.

Specifically, it pays the difference between the actual cash value of your car at the time of the loss, less the deductible (and the vehicle's salvage value if retained by the owner or insured) and any greater amount owed on the vehicle to a lender at the time of loss.

Lynne McChristian, a spokeswoman for the Florida wing of the Insurance Information Institute (III), says gap insurance (which is an industry acronym for "guaranteed auto protection" or "guaranteed asset protection") can be a worthwhile add-on to an existing policy.

"As soon as you drive your brand new car off the lot, it loses value," she points out. "If you didn't put much money down on it, then there is a gap between what it's worth and what you still owe. Simply, the smaller your down payment, the more you need gap insurance."

Edmunds.com says the average new car depreciates 11 percent as soon as you steer it off the lot. And during the first five years, the car depreciates from 15 to 25 percent each year. Edmund's "True Cost to Own" tool lets consumers determine general depreciation numbers for their vehicles.

But there are limitations with gap insurance. For one, it doesn't cover negative equity. For instance, if you roll the outstanding balance of your prior car loan into your new car loan, gap insurance will cover just the new car loan.

Here are other things gap does not cover, according to Gusner:

  • Vehicle payments due to financial hardship, job loss, disability or death
  • Car repairs
  • The value of your car or balance of a loan if your car is repossessed
  • A rental car while your car is in the shop
  • A new vehicle's down payment
  • Extended warranties you add to your car loan

Liz Weston, a financial columnist for MSN Money, says gap insurance can be a good idea, if you can afford it and don't have a lot of cash handy. "Unless you have money sitting in the bank to pay off the balance of your loan above the car's worth, which most people don't, gap insurance would be necessary," she says.

Who needs the protection the most? Weston believes car owners who don't put 20 percent down on a car or who have a loan longer than four years are probably good candidates.

Here are five things to keep in mind when buying gap car insurance:

1. Buying gap insurance at the dealership is a bad idea.

Most industry experts say the cost for coverage can be twice as high, or even higher, if you purchase from the guys that sell you the car.

"You can save a bunch when you buy gap from your own insurer, rather than from the auto dealer or leasing company," says McChristian. "Their coverage may be three to four times more costly."

Weston says part of the reason the coverage is more expensive at a dealership is "because it goes in the loan and is then plus interest."

Gusner says costs vary due to insurance companies' different rating systems, but typically gap insurance is calculated as being 5 percent to 6 percent of your physical damage coverage costs. "If your collision and comprehensive costs are $500, gap insurance coverage will add around $25 to your overall premium," she says.

Another benefit to purchasing gap insurance from your car insurance company is that you'll only need to file one claim if your car is a total loss.

2. The car must already have collision and comprehensive insurance coverage.

This is simply because the actual cash value of your vehicle needs to be paid out by an insurer in order for your lien-holder to be paid the remaining amount through the gap coverage.

3. Only keep coverage as long as needed.

Keep in mind that the coverage is usually only necessary for about three years on a new car with a small down payment. At the most, gap insurance is reasonable for five, maybe six years, according to experts. Make sure you drop the coverage when you can.

4. Know what's covered -- and what's not.

Details can vary from insurer to insurer. Some provide coverage that goes past the cost gap, such as making overdue lease or loan payments. They may also pay for the cost of an extended warranty that you bought at the same time you purchased the vehicle. It all depends on the individual company, so ask questions and study your policy.

Once you've decided on an insurer and the policy terms, Weston recommends doing a final check with rating services like A.M. Best and Standard & Poor's to determine the financial stability of the company. This is clearly important if you have to make a claim.

5. Gap insurance doesn't transfer from one car to another.

If you want to trade in your old car for a new one, you'll have to buy a fresh gap insurance policy for the new car. But keep in mind that if you paid for your current gap policy in-full, you should receive a refund for the unused portion of that policy.

Affordable cars for young drivers

If you're looking for recommended cars for young drivers, Kelley Blue Book website editors say the following models are practical and affordable yet stylish. The average selling price for new cars last year was $31,762, a 3 percent jump from 2012, according to the National Auto Dealers Association. To find average car insurance rates for your state, use our average car insurance rates calculator.

KBB.com's 10 Best Back-to-School Cars for 2014

Rank

Vehicle

Kelley Blue Book
Fair Purchase Price

1.

   2015 Honda Fit

$15,994

2.

   2014 Kia Soul

$14,623

3.

   2014 Nissan Versa Note

$13,868

4.

   2014 Mazda Mazda3

$16,761

5.

   2014 Toyota Prius c

$18,309

6.

   2014 Honda Civic

$17,191

7.

   2014 Chevrolet Sonic

$14,366

8.

   2014 Mitsubishi Outlander Sport

$18,925

9.

   2015 Volkswagen Golf

N/A

10.

   2014 Subaru Impreza

$17,490

 

 

*The Kelley Blue Book® Fair Purchase Price (FPP) is updated weekly to show shoppers what others have been paying for this car recently.  FPP data in chart is for base model and was sourced from KBB.com on July 25 2014.  FPP data is not yet available for 2015 Volkswagen Golf.

 


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3 Responses to "5 tips for buying gap insurance for your new car"
  1. Christina

    I bought gap insurance from the dealership, the car ended up getting stole and set on fire. It was a total loss, my insurance company paid what it was worth but that left a little over $3,000 owed on it. I now have a collection agency taking out a judgement on me because the dealership didn't pay the difference. What do I do?

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  2. carol montoya

    I had a 2012 Ford Fusion. i had some problems with my insurance agent claiming my insurance was cancelled for non-payment. Well we went back and forth and it ended with our insurer not covering our total loss car. i do have gap insurance . Will it cover my entire car or can it cover what it's worth. What am I liable for?

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  3. Rick Quiroz

    If a car is stolen and the insurance does not cover it for some ever reason. Does gap insurance still take care of the loan on the car?

      Reply»