Unlike with most other types of insurance, there are times when guaranteed protection insurance may be worth it and times when it may be a waste of money. The goal of gap insurance is to protect new vehicle owners and lessees from the "gap" between an outstanding loan or lease balance and a vehicle's actual value in a total loss accident or a theft situation. Factors such as vehicle's age and depreciation rate, the loan term and size of any down payment play a major role in making a wise decision.
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Negative Equity Situations
Gap insurance may be worth it if you're upside down -- if you owe more on a vehicle than its current cash value. Many drivers are upside-down from the minute they drive a new car off the lot until about three to four years later. This is due to new car depreciation and factors that extend the time it takes to build positive equity. Circumstances that can create a negative equity situation and make gap insurance worth it are:
- A down payment of less than 20 percent
- Long-term financing of 60 months or more
- Rolling a negative equity trade-in into a new car loan
- Driving more than 15,000 miles each year
After-Market Purchases and Customizations
Most gap policies cover only the vehicle and factory-installed equipment, not after-market upgrades, even if you roll them into the loan. After-market upgrades include items purchased and installed at the dealership before you take possession and equipment or customizations installed after the delivery date. The more you spend on after-market equipment and customizations, the greater the chance that gap insurance won't cover the entire financial shortfall.
Comparison-shopping is critical to making a decision about whether gap insurance is worth it. Although coverages and exclusions vary between insurers, some of the most common exclusions may be necessary to make gap insurance a wise choice for your situation. According to the Risk Management Institute, insurers commonly exclude:
- Overdue loan or lease payments
- The cost of an extended warranty or credit life insurance
- Insurance deductions for wear and tear, prior damage, towing and storage
- Negative equity from an over-valued trade-in
Gap insurance might be worth it if you purchase coverage from your existing auto insurance company. According to Penny Gusner, a consumer analyst for Insure.com, adding it as a rider to existing collision coverage increases your monthly premium by about $25, or about $900 if you keep the insurance for three years. However, purchasing gap insurance from the dealership and rolling it into the loan could increase the cost by up to four times higher after you consider the additional interest.