Gap Coverage Car Insurance for Financed or Leased Vehicles


What is gap insurance coverage and do I need it for my new car?

Your car insurance company will settle any losses on an actual cash value basis. This means they will take the replacement cost and subtract an amount for "wear and tear" on the vehicle. This amount is called depreciation. The older the car, the more depreciation will be deducted from the value of the vehicle. As soon as you drive a new car off the dealer's lot, the vehicle depreciates substantially.

Gap insurance is an added coverage that you can purchase on your personal car insurance policy to cover the "gap" created between what you owe on your car and the actual cash value of the vehicle. For example, let's say you purchase a new 2008 Honda Accord for $24,000 and finance the entire amount through American Honda Finance. You notify your insurance agent of your new vehicle and the car is added to your car insurance policy with American Honda Finance as the lienholder on the vehicle.

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Eight months later, you slide on the ice and your car rolls into a ravine, totaling the vehicle. Your insurance company will pay you the actual cash value of the vehicle at the time of the accident, which we'll say is $19,500. You've only made 8 payments on the car, and you still owe over $22,000 to American Honda Finance. If your insurance company will only pay $19,500 and you owe $22,000, that's a gap of $2,500 that you will have to pay out of your own pocket unless you carry gap insurance.

Gap insurance has become a more important optional coverage for consumers as car manufacturers offer zero percent financing on many models. This entices consumers to purchase new cars and trucks, and the used car market is flooded with models that are only a couple of years old. This drives down used car values and increases the gap between actual cash value and financing amounts even further. The coverage is available for purchased or leased vehicles, and is very affordable, at about 2 percent of the physical damage cost.

If you recently financed or leased a new car, you might want to seriously consider taking a look at putting gap coverage on your car insurance policy. For a minimal cost, you can protect yourself from having to pay the difference between what your insurance company will pay and what you owe your bank or financing company in the case of a total loss of your vehicle.

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