It is no secret that when you drive a brand-new car off the lot, it immediately depreciates in value – oftentimes, by thousands of dollars. While this is never a positive thing, it can be even more problematic if you get into a car accident
soon after purchasing the new car. Gap (Guaranteed Asset Protection) insurance is a financial solution for this specific situation.
What Is Gap Insurance?
Gap insurance pays for the difference – the “gap” – in the amount of money you receive from a car accident insurance claim for a totaled vehicle and the value of the loan you took out to purchase the new car. For example, say you took out a $20,000 loan to buy a new car. When you drove the vehicle off the lot, it immediately depreciated in value to $17,000. Then, you crashed the car while you were still paying off the loan.
Upon reviewing your case, a car insurance company offers you $17,000 for your property losses – the pre-crash value of the totaled vehicle. However, you will still be indebted to your loan service provider for the full $20,000 that you took out to buy the new car. Who pays for the remaining $3,000 – the difference between the pre-crash value of your new car and the amount you owe a loan provider? Gap insurance pays, if you have it.
What Does Gap Insurance Cover in a Car Accident?
Gap insurance pays the difference between what you still owe on your newly bought vehicle and its market value at the time of an accident or incident. It will cover this difference whether you caused the car accident or not, in most cases. Gap insurance can cover this amount after many different types of vehicle-damaging incidents, including:
- Car accident
- New vehicle theft
- Storm or weather damage
- Car fire
Gap insurance does not cover the sale of a vehicle or trade-in. Most policies also do not cover vehicles that are more than a year old. Finally, gap insurance will not help you pay to purchase another vehicle after yours is damaged or totaled; you would need a different type of insurance – new car replacement coverage – to help you pay for a new vehicle.
Do You Need Gap Insurance?
Gap insurance can help you protect yourself financially when you purchase a new car in Texas. It allows for the difference between the value of the loan you took out and the depreciated value of your vehicle once you drive it off the lot – protecting you from having to pay this difference out of pocket should anything happen to your new car. A standard car insurance policy will not cover this difference. You must have gap insurance for this specific type of coverage.
Not every new-car buyer needs to purchase gap insurance. However, if any of the following circumstances apply to you, it may be in your best interest to purchase gap insurance coverage in Texas:
- You have purchased a car that is brand new or less than a year old.
- You will owe more on your lease than the depreciated value of the vehicle.
- You are leasing the vehicle.
- You purchased a car that depreciates quickly.
- Your vehicle is a popular model for auto theft.
- You want peace of mind after taking out an auto loan on a new car.
In some states, an auto dealership is legally required to offer gap insurance when the buyer is purchasing the vehicle. However, this is an optional type of coverage that the driver does not necessarily need to buy. If you’re not sure whether gap insurance is a smart investment for you, calculate how much you would have to pay out of pocket should your car get damaged or destroyed. Subtract the current value of your car amount from your vehicle loan. If you are not comfortable paying this amount yourself, you may wish to invest in gap insurance.