Many people don’t realize that when they are car shopping, they might need to be in the market for gap insurance, too. New car purchases and gap insurance go hand-in-hand, yet many drivers don’t know what it is or misunderstand its reach. So if you’re buying a new car soon, it’s best to know about gap insurance before you head to the dealership.

“Many car owners believe gap insurance is a catch-all policy that makes their car payments anytime they’re unable to,” says Penny Gusner, the consumer analyst for CarInsurance.com. “That is not the case.”

Gap insurance protects you if your vehicle is totaled or stolen and you owe more than it’s worth to your lien-holder.

Specifically, it pays the difference between the actual cash value of your car at the time of the loss, less the deductible (and the vehicle’s salvage value if retained by the owner or insured) and any greater amount owed on the vehicle to a lender at the time of loss.

Lynne McChristian, a spokeswoman for the Florida wing of the Insurance Information Institute (III), says gap insurance (which is an industry acronym for “guaranteed auto protection” or “guaranteed asset protection”) can be a worthwhile add-on to an existing policy.

“As soon as you drive your brand new car off the lot, it loses value,” she points out. “If you didn’t put much money down on it, then there is a gap between what it’s worth and what you still owe. Simply, the smaller your down payment, the more you need gap insurance.”

Edmunds.com says the average new car depreciates 11 percent as soon as you steer it off the lot. And during the first five years, the car depreciates from 15 to 25 percent each year. Edmund’s “True Cost to Own” tool lets consumers determine general depreciation numbers for their vehicles.

But there are limitations with gap insurance. For one, it doesn’t cover negative equity. For instance, if you roll the outstanding balance of your prior car loan into your new car loan, gap insurance will cover just the new car loan.

By Mark Smith

See full story at www.carinsurance.com