Car insurance can be costly, how to save on car insurance especially if you’re not being smart about how you buy it. Gap coverage may seem like a great way to save money, but in some cases it may not be right for your situation at all. Here’s what you need to know about this insurance option to make sure it’s right for you and your vehicle.
How to Save on Car Insurance
The facts about gap insurance
In case you’re not familiar with it, gap insurance pays for repairs in a collision if your car is worth less than what you owe. Many people don’t realize that their standard auto insurance won’t help them out when that happens. For example, if your car is totaled and it costs $10,000 more than you owe to replace it (because depreciation can be steep), you’ll be left on the hook for $10,000. In some cases—say, if you’re financing a new ride and aren’t keen about continuing payments after an accident or total loss—gap coverage may be worthwhile. But otherwise, you should probably skip it.
That’s because gap insurance will cost you between 3% and 5% of your loan amount each year—and that’s money that could go toward paying down your principal instead. Plus, if you have comprehensive and/or liability coverage, there are ways to protect yourself from a big repair bill without spending extra cash on gap insurance. Read on for how to do just that…
Why is gap coverage important?
If you’ve ever suffered a total loss due to an accident, you’re probably aware of how car insurance works. After all, it’s not every day that your vehicle is declared a complete loss. Unfortunately, when it does happen, it can have a major impact on your finances — even if you weren’t at fault for the accident. For example, let’s say you own an SUV that costs $30K and has a book value of $20K.
If you had comprehensive and collision coverage from your insurer and were in an accident that totaled your vehicle ($10K worth of damage), then your insurer would only pay out $10K for damages — leaving you with another $10K to replace or repair before your vehicle is as good as new.
What happens if your car is totaled in an accident?
It’s easy to think that you’re covered, but when it comes time for a claim, you may find that your car insurance policy falls short. This can be due to several factors—for example, if your deductible is too high or your policy is underwritten by a small insurance company—but gaps in coverage are more common than you might expect.
If you’re not sure how auto gap coverage works and why it’s important, read on. We’ll help explain what gap insurance is and whether or not it’s right for you. You’ll also learn about which companies offer gap coverage, so you can compare quotes from different providers. By learning about auto gap insurance now, you can save yourself from potentially large expenses down the road.
A car has a value of $20,000: The difference between actual cash value (ACV) and market value (or retail value) of an automobile affects many policies because ACV is usually less than market value.
Let’s say you hit a deer.
This is an obvious example, but sometimes you’ll find yourself in a situation where your car insurance company won’t cover an incident under your regular policy. For example, if you’re in another state when your car breaks down and you need a rental for several days, your insurance might not cover it. If that happens, it can cost hundreds of dollars out of pocket—but gap coverage might save you money.
Here’s how: When you buy gap coverage (sometimes called guaranteed auto protection), the insurer will agree to cover certain costs that exceed what your other policies will pay. You might be able to get one year of coverage for as little as $50 or $100, depending on your age and location.
Will your insurance company total the car if it has been damaged beyond repair?
If you are in an accident, your insurance company will pay out a claim based on what it determines is fair market value (FMV) for your car. Depending on how extensive the damage is, that value could be considerably less than what you owe. If your car is totaled, it may have salvage value—but if your insurance company decides not to go through that process, there may be little hope of recovering much money from them.
Gap coverage can be valuable when purchasing car insurance if you are at risk of owing more than what your FMV claim pays out. There are different terms and definitions associated with gap coverage so make sure you review your policy carefully before making a decision about whether or not gap coverage is right for you.
Should you purchase gap coverage from your current provider, or get it from a third party?
Third-party providers are generally more willing to work with people who have recently declared bankruptcy, but don’t let that deter you from comparing them with your existing insurance provider. Many companies offer great discounts and special packages for customers who have just declared bankruptcy—so make sure you ask about them.
If you choose a third-party provider, be prepared to pay for any increased premium payments out of pocket; many insurers won’t cover these costs. You’ll also need to get an estimate of your vehicle’s value from a third party (sometimes called a vehicle auction estimator) so you can properly determine what amount will be paid out in case of damage or theft.
What if you have more than $5,000 in outstanding loans left on your vehicle?
If you have more than $5,000 in outstanding loans left on your vehicle and its value is below that threshold, it may be time to consider gap coverage. Gap insurance covers that difference between what you owe and what your car is worth if it’s written off in an accident.
If a fire or other event happens to your car that is not covered by your standard auto insurance policy, gap coverage can help you pay off any debt left on a vehicle. For example, if a minor accident destroys your car but only leaves $3,000 of damage (and thus liability), gap coverage would cover an additional $2,000 from your total loss deductible.
Final thoughts and tips for saving on car insurance without sacrificing protection.
In addition to using a simple online car insurance quote comparison tool and shopping around, you can save hundreds of dollars each year by following some simple tips. One of these is gap coverage, which is an optional add-on that covers your vehicle’s gap between what it would cost if totaled and what its current value is.
Your vehicle’s value minus its loan or lease payment would be covered under standard coverage (known as liability insurance), but with gap coverage in place, you have nothing left over to worry about. A $5,000 deductible applies when buying gap insurance; however, it can pay off if you end up being in an accident that totals your car and leaves you stuck paying more than its worth.