Driving Smart Video: Do I Need Gap Insurance?

CARS.COM — You've heard of health insurance, homeowners insurance and even pet insurance — but what about gap insurance? No, it's not coverage for your moderately priced khakis and tasteful sweaters. It's for your car — or more specifically, it's for the full value of your car.

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You may be aware that your new car loses roughly 10 percent of its value the moment you drive it off the dealer lot. On average your car will continue to depreciate by an average of 15 to 25 percent each year, according to CarFax.

But, hey, that's the cost of car ownership. And if anything happens to your car before you pay off your loan, your comprehensive or collision insurance will replace your ride, right? Not necessarily.

If your car is stolen and not recovered, or crashed and declared a total loss, your auto-insurance carrier may not wholly make you whole. Instead, they'll reimburse you for the "actual cash value" of your car — which, remember, has been losing value since the moment it became your car — less your deductible.

Because your car may depreciate faster than your car payments reduce your loan balance, you may still owe thousands of dollars more than that actual cash value your policy pays out. Gap insurance covers this difference so you can catch a ride back to the dealership and roll home in your brand-new replacement car - and all you'll be out is your deductible plus the time it takes to reprogram your stereo settings.

Esurance estimates you can purchase gap insurance for a few extra bucks a month on your vehicle's policy, or you can buy it from the dealer for around $500 to $1,000.

Now, if you own your car outright, gap insurance probably isn't a great investment for you. How do you know if you should purchase gap insurance?

State Farm advises considering the coverage if:

  • You bought a model with a history of rapid depreciation that will outpace your payment schedule.
  • You made a down payment of 20 percent or less.
  • You financed your car for an extended period of time, as auto-loan terms of 72 to 84 months have become prevalent in recent years, pushing the average payoff time to record highs.

Feelin' lucky? Take your chances and go without. But if you wanna be on the safe side, then as they say in London: Mind the gap.

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