Aaa Auto Insurance Gap Coverage – What is Gap Insurance? And what does that really mean? What is the difference between gap insurance and car insurance?
If you’ve ever spent a Saturday afternoon in the finance office of a car dealer, you’ve probably heard of deficiency insurance. But maybe he didn’t quite know what that meant. If so, you are not alone. Put simply, shortfall insurance – short for guaranteed asset protection – can cover the difference between the insurance payout (the total loss) and what is still owed on the vehicle. The difference between the numbers is often large, filling a shortfall of thousands of dollars.
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In order to better understand the role of deficiency insurance, it is useful to know why there might be a deficiency in the first place.
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Two key numbers come into play: the loan balance and the car’s insurable value. Both decrease over time, but not at the same rate. The balance of the loan changes as the payments are made, but a larger percentage goes to interest at the beginning of the loan.
The insured value reflects the market value of the car. Insurers may use their own valuation tools, but you can use the equipment selector in our Buyer’s Guide or the NADA pages to approximate your car’s market value.
Before the market turned and demand for new cars far outstripped supply, you could expect the value of a new vehicle to depreciate by 20 to 30 percent in the first year. So, if you bought a $40,000 vehicle when parts shortages weren’t as big of an issue, it could be worth about $8,000 less in a year, making it worth $32,000.
Let’s say you’re involved in an accident about a year after you buy a new car that you’re at fault for. Fortunately, you have collision insurance, so your insurance will help pay for the repairs. However, the value of the car determines how much the insurance company will pay, or whether it will repair the car at all.
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It’s not unusual for an insurance company to consider a vehicle a total loss if the estimated repairs reach 70-80 percent of the car’s insurance value. Auto body shops often find additional damage after the car is taken apart for repair, adding to the overall repair cost.
For your (currently) $32,000 car, that means if the estimated repairs are more than about $22,000, the insurer may consider the vehicle a total loss.
If the car is a total loss, the insurer will write a check for the value of the insurance, in this example, likely reducing your deductible by about $32,000. The deductible is part of the paid claim. Collision insurance deductibles are often $500-$1,000. Let’s say you chose a $1,000 deductible. In this example, the insurer pays $31,000.
When he bought the car, he financed the $40,000 purchase with a 72-month loan at 5 percent interest. Your trade included tax and price tags. After 12 months of payments, the car loan balance is approximately $34,000.
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However, this example is one of the less problematic scenarios. If the car you choose depreciates faster or pays a higher premium or higher interest rate than the market price, the difference can be much larger.
Without gap insurance, you can still have a balance on a totaled car while you need to buy a new car.
Some car insurance companies offer shortfall coverage, but shortfall coverage is not part of standard auto insurance. Instead, it’s an add-on that can make up the shortfall if the car is totaled and the claim payment is less than the loan balance.
Although not part of your auto insurance policy, incomplete coverage is an addition to two auto insurance coverages: collision coverage and comprehensive coverage.
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If any of these coverages occur and the insurer declares the vehicle a total loss, the shortfall insurance can cover the difference between the insurance payment and what you still owe on the vehicle.
Comprehensive car insurance includes liability insurance, health insurance (if needed) and physical damage insurance. However, incomplete insurance is a separate product and does not automatically belong to comprehensive car insurance.
Even if you have full coverage, shortfall insurance can be a wise choice in certain situations, such as when you have low or negative equity in a vehicle. Negative equity, also known as “upside down” in a loan, refers to debt that exceeds the value of the vehicle.
You can buy shortfall insurance through dealers and lenders or insurance companies. When you buy through a dealer or lender, you often have to pay a fixed amount to cover the shortfall. With an insurance company, you often pay for the vulnerability annually or with your six-month auto insurance policy.
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Cancellation costs and contracts may vary depending on where you purchased your insurance. If you keep the car and keep making payments, at some point you’ll end up owing less than it’s worth. This means you won’t need gap insurance forever.
It may be cheaper to buy shortfall cover through your insurer because you won’t have to pay cover interest and it will be easier to cancel when the time comes.
If you buy gap insurance from a dealer, it can cost up to $700. Stand-alone loophole insurances often cost less, but can cost as much as $300.
In many cases, the cheapest way to buy personal injury insurance is through your insurance company. If your insurer offers coverage, you can often add gap coverage for $20 to $40 a year, according to the Insurance Information Institute.
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The insurer’s costs covering the shortfall may take into account the damage history or other factors. In contrast, creditor-purchased shortfall insurance often uses a flat-rate model based on the value of the vehicle.
If you only need gap cover for a few years, getting gap coverage through your car insurance company can be the cheapest option. However, not all insurers provide shortfall coverage.
If you no longer need gap insurance, you can contact your insurer to cancel that part of your coverage while keeping your other coverage, such as collision coverage or comprehensive coverage.
As with all financial products, it’s worth reading the fine print about vulnerability insurance. Some deficiency policies cover up to $50,000, while others take a percentage of the vehicle’s actual cash value (ACV). Actual cash value refers to the depreciated value of the car, not the cost of the trade-in.
How Does Gap Insurance Work After A Car Is Totaled?
When purchasing deficiency insurance, ensure that the amount of coverage is sufficient to cover the difference between the loan balance and the car’s insured value for the first few years of ownership and until the vehicle has positive equity.
If you put 20 percent or more down on your vehicle, you may not need shortfall insurance. But for many buyers, shortfall insurance offers additional financial security.
Gap insurance itself does not cover theft. Your comprehensive insurance makes it possible. Instead, shortfall insurance can cover the difference between the amount the insurer paid for the stolen vehicle and the amount you still owe.
However, if you do not have full coverage or choose to cancel your coverage, the shortfall insurance will not cover the loss. In fact, shortfall insurance works as a supplemental insurance that complements physical damage insurance. But if there is no basic coverage, then shortfall insurance cannot play a greater role.
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There is no need to take out gap insurance indefinitely. As a financial instrument, shortfall insurance only makes sense if there is a lack of coverage.
Keep an eye on your credit statements to see your current auto loan balance. At the same time, check the value of your vehicle to determine when you can cancel your shortfall insurance. If you are confident that you owe less than the car is worth, you no longer need payment deficiency insurance.
However, if your estimates are not 100% accurate, you can wait until you have a buffer of $1,000 or more.
While most states require auto insurance, at the state level there is no requirement for gap insurance. However, in certain cases, creditors may require shortfall insurance.
Is Gap Insurance Worth It?
For example, in the case of a vehicle lease, the lease agreement may require shortfall insurance. Additionally, lenders may require incomplete insurance if you don’t put a lot of money aside when purchasing a vehicle or if you choose a longer loan term, such as 72 months.
Unless the condition of the loan or lease is mandatory, the decision to purchase shortfall insurance is entirely yours. If you paid a significant down payment on a car, you may not need it at all. However, some vehicles depreciate very quickly, possibly exceeding the down payment, so it is worth deciding on a case-by-case basis.
If you decide to buy gap insurance, try to do it on your terms. Buying your insurance through an insurer rather than a dealer or lender may be the cheapest option. See how you can reduce your rising costs with our car insurance comparison tool. You’ll be on your way to further savings in just a few minutes!
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