Do You Need Gap Car Insurance?

Just stop for a second! When you think of term life insurance, a value-decreasing type of insurance, consumers buy a product to cover the money owed on a mortgage, for instance, in the event they die. On the other hand, if you get into an accident with your auto, do you really need gap car insurance, that is, money to cover whatever is owed?

The reason for this auto coverage is not dissimilar to decreasing life insurance, but would it result in coverage that auto owners should not be without? I don’t know anybody who likes to pay auto insurance premiums, maybe because they’re usually government-mandated, but that doesn’t mean you don’t want insurance when you need it, like when you need to pay a friend’s or loved one’s medical bills. You’re risking your finances if you roll the dice on car insurance. But geez! Extra insurance?

So, Why Purchase Gap Car Insurance?

You must take a close look at gap insurance before purchasing it, as it’s not a required policy. I mean, just buy a car well below the MSRP and suck up any depreciation as a hedge against abject poverty! Seriously, gap insurance coverage meets the difference between the book value of your car and the value your insurance company pays in the event of an accident, set against how much you have left to pay in monthly premiums. So, like your house, you can be underwater on your car payments.

If you bought your car below the list price, your book value over the car payment period will keep you above water, probably for the loan term. In other words, if your $45,000 car (that you paid $35,000 for just 18 months ago) is wrecked, the book value will be reimbursed completely by your car insurance policy.

But if you paid more than the MSRP, like $55,000 for a $45,000 car, this creates a $10,000 gap, and you may want to buy gap insurance. With a typical policy, the insurer will not insure it above the list price. After 18 months, the insurance company will pay the book value, say $35,000, but you financed it for $55,000, and you have many payments left to make. In this scenario, it’s a good idea to buy gap insurance.

Then again, who buys above the MSRP? In reality? Consumers do! If a desirable car commands a higher market value when the model is popular, then a car dealer can get customers to pay over the MSRP. Indeed, you may have to pay over the list price to get your hands on a particularly desirable car. That’s true of many luxury and performance cars. For example, Aston Martins, Bentleys, and Porsche automobiles can command MSRPs above the list price of a vanilla make and model car, and who doesn’t want to get their hands on a Porsche?

If you choose to buck conventional wisdom and buy a car above the MSRP, you’ve created a gap that gap insurance covers.

Of course, most financial advisors (worth their salt) would advise against buying a car that could depreciate faster than an EBay timeshare, but who believes an Aston Martin will depreciate? If James Bond drove it, and it was full of bullet holes, the value would only go up, right? Of course, the trick is to find the buyer in the event of the sale, and they can seem as rare as the car!

Since when is anything so smart? You could buy say, a Toyota Corolla and drive it like a BMW 380! You would wreck an otherwise reliable Corolla in 100,000 miles!