Insurance 101: Automobile Insurance - Gap Insurance Vs. Depreciation

Your new car is beautiful. You got a great deal. Let's say you paid $20,000 for a fully loaded top-of-the-line SUV. You financed it through your favorite bank, called your insurance company to add the car to the policy, and pulled out of the dealership parking lot!

BAM! Did you know that the second you pulled off the dealership parking lot the value of your car depreciated? After all, it's not brand new anymore! The average vehicle owner does not realize that there will be a point during the life of the vehicle where the amount still owed to the finance company is greater than the value of the car. Now that stinks, does it? It's called being upside down on your loan.

The problem really doesn't rear its ugly head unless you get into an accident. Say your car is totaled. The loss payee (ie., your bank - see our installment on Additional Insured's and Loss Payees) wants you to pay off the loan, but your insurance company only wants to pay the blue book value of your car. Now we have a problem.

If the outstanding loan is $15,000 and the bluebook value of your car is $10,000, there is still $5,000 outstanding. YOU are responsible for the $5,000, but there is a way to get around having to pay that out of pocket.

When you signed the finance paperwork on your new vehicle, your dealer may have offered you something called gap insurance. For a nominal fee, gap insurance will cover the difference between your loan amount and the blue book value of the car if you have an accident during the course of the loan. When I say nominal fee, I am talking anywhere from $200-$500 for the entire course of the loan (3-5 years? Whatever you chose!)

Your automobile insurance company may sell gap coverage, but it's not common at all to see it included in the average insurance policy. It's normally purchased separately, from the dealership. Sometimes it is even included in the actual finance contract.