When Should I Cancel My Gap Insurance?
Getting a new car is always exciting — though you may not be so enthused about all of the paperwork that comes with it. If you’re in the final stages, you have probably already weighed all of your options regarding what type of vehicle, make, model, and year -- and hopefully even how you’re going to pay for it. You have probably also accepted the reality that a car is a depreciating asset -- as soon as you drive your new set of wheels off the lot, the value will go down.
But what if you are financing the entire cost of your vehicle with a loan? Won’t that leave you in a tricky situation if your car is ever totaled?
Gap insurance is a great coverage option which protects for when you owe more on your car lease than what your vehicle is worth, and often required by a lender if you’re financing your vehicle through a bank or credit union.
The reason gap insurance matters is that if you total your vehicle or it is stolen, your regular insurance policy will only cover the cash value of the car at the time it was damaged or taken -- meaning that if you owe more than this amount on the car loan, you are left owing a lot of money for something you don’t even benefit from any more.
Depreciation happens fast, especially if you have purchased a new vehicle, so it’s important to keep this risk in mind if you’re thinking of making a small down payment. A new vehicle depreciates the moment you drive it off the lot and loses half of its value in the first five years.
Hopefully, there will come the point when you no longer need gap insurance coverage. Knowing when that time is can save you a lot of money. Cancel gap insurance too early, and you could lose out on the valuable coverage. Cancel it too late, and you are going to end up paying for insurance coverage you do not need. Check out these helpful questions to help you determine when you should cancel gap insurance.
How Much Do You Owe on Your Vehicle?
Knowing what you owe on your vehicle is the foundation of understanding gap insurance. If what you owe exceeds the retail value of your vehicle, gap insurance covers the difference. Review your payment information and find out how much you owe on your vehicle.
Generally, the longer the life of your loan, the longer you will need gap insurance. Paying a loan off over a longer period of time means that you might not “catch up” to the amount that your car will be depreciating. Likewise, paying a loan off more quickly will generally mean you’ll need gap insurance for a shorter amount of time.
Did You Finance Extras Along with Your Vehicle?
If you wrapped up a previous vehicle's debt or loan with your current auto loan, gap insurance does not cover that prior debt. Same goes for warranties which are rolled into the loan. Gap insurance only covers the cost of the vehicle. Keep these factors in mind when determining how much you owe for the vehicle itself.
How Much is Your Vehicle Worth?
Now it is time to compare what you owe with what your vehicle is worth. Each insurance carrier has its way of computing what the value of a vehicle is. They do not use Kelley Blue Book to determine a value, but it is a free and valuable resource you can use to calculate a ballpark estimate of your vehicle’s worth.
Input your vehicle's information as accurately as possible. Then select “private party value” to give you the most accurate calculation. Do not assume the number listed in Kelley Blue Book is the concrete number you will receive if your vehicle is totaled, resulting in a total loss situation. Like mentioned earlier, the Kelley Blue Book value is just a ballpark figure.
Removing Gap Insurance
When comparing your vehicle's worth against what you owe, gap insurance is only worth it when you owe you owe a lot more than the vehicle is worth. You should consider canceling your gap insurance coverage when you are at a point where you owe one to two thousand dollars less than what Kelley Blue Book lists as your vehicle’s value. Typically, once you meet this threshold, the difference between what you owe and what the vehicle is worth continues to grow steadily. It is not impossible to still come up short in a total loss, but the difference ought to be manageable (and cheaper than the cost of keeping gap insurance coverage).
Also, if you only owe a little bit on the vehicle, it makes more sense to set aside this money in a savings account than it does to pay for insurance. You need to be sure that you have the discipline not to touch this money!
Many insurance carriers automatically drop gap insurance coverage once a vehicle is two to three years old. Keep an eye on your specific circumstances such as amount owed and vehicle's worth to make sure that this is the best option for you.
The Cost of Gap Insurance
Gap insurance is very affordable coverage. Many times it is only a couple of dollars a month. The likelihood of using the coverage is not all that great which in return makes it inexpensive. It is better to keep the coverage if you think you could owe more than the vehicle is worth. Or, ask your insurance agent to help you determine if you still need the coverage. Contact the company in which you have purchased gap coverage to request removal if you believe it is no longer necessary.