Monday, September 16, 2013

When Gap Car Insurance Isn't Necessary

Gap auto insurance, in case you didn’t know, picks up the tab if your car is totaled and you owe more than it’s worth. Although gap insurance coverage can be purchased for as little as $30 a year it isn’t always necessary.

One instance is if you pay cash for your new car; if you don’t have an unpaid loan balance, there is no financing gap to worry about.

However, paid for or not, a new car will still depreciate at the same rate. In this case you might want to look at New Car Replacement Insurance.

New car replacement insurance is offered by a number of carriers for different lengths of time. Some insurers offer replacement insurance for only a month while others, such as Allstate, offer a plan where “you may be able to get a totally new car” if totaled in the first three model years.

A second instance when you would not need gap insurance is if you put at least 20% down. In most cases if you put 20% down the rate at which the car loan is paid down should track pretty close to the depreciated value of your car.

Another situation where you might not need gap protection is if you lease a new or used car. In many states, such as New York, gap insurance is mandated by law to be included in the quoted lease payment amount.

Yet despite this there are unscrupulous sales people who will try to sell you gap insurance anyway – and it won’t come cheap. The gap insurance sold by car dealerships today is a high profit add on much like upholstery protection or under carriage coating was years ago.

The average one time payment for gap insurance purchased from a car dealer averages around $548. This is almost 5 times more than it would cost if purchased from a major insurance carrier for as long as you needed it.

The last example illustrates why you would need gap insurance, but for only a short period of time.

The recent loosening of bank purse strings has also meant lower car financing rates for both new and used cars. As a matter of fact the rates are very similar. At these new low rates the outstanding loan balance and depreciated car value quickly reach parity – usually within two years.

However, that first year of car ownership is still a killer for car values. For instance, if you borrowed $40,000 for 60 months at 6% with zero down, 20% of the loan would be paid in the first year but your car would have depreciated 25%. This would leave you owing roughly $2,500 more than the insurance company would pay out if your car was totaled during the first year of ownership.

But, as previously mentioned, during the second year of ownership the value or your car and the loan balance would even out. So although you won’t be able to eliminate the purchase of gap insurance entirely, you would only need it for the first year of ownership.