What's gap insurance and why does anyone need it?

Cars in junkyard

Drivers who have never had their car stolen or totaled in a wreck have probably never heard of gap insurance – or discovered why they need it.

But read the mouse print in your auto insurance policy and you will discover that in the case of a total loss, your insurance company is only going reimburse you, or more likely whoever financed your car, for the book value of the car at the time of the loss.

If you owe more on your car than the book value -- and many people do -- you suddenly find yourself making up the difference out of your own pocket.

It is in addition to whatever deductible you might also have to absorb.

It could be thousands of dollars.

Gap insurance is designed to make up the difference between what you owe on your car and what your insurance company will pay.

Determining what that gap might be in your case is as easy as getting a payoff from your auto loan provider and then going to a consumer Web site like Kelly Blue Book that provides the latest used-car value information.

However, there are a number of factors, such as financing for 60 months or more, putting less than 20% down, rolling negative equity on a previous car loan into your new loan or driving more than 15,000 miles annually, any one of which signals you might owe more than the car is worth.

Most insurance companies offer gap insurance to cover that difference.

Gap insurance is relatively inexpensive and is based on the cost of the collision and comprehensive coverage in your current auto insurance policy.

Traveler's Insurance told me it computes gap insurance at about 5% of the cost of collision and comprehensive coverage.

A $1,400 annual premium includes roughly $420 to $560 for its collision and comprehensive coverage. That would put the cost of adding gap insurance at $30 or less per year.

Although gap insurance is one of those extra-cost add-ons many dealerships offer when you buy a new car, most insurance companies will let you add gap insurance to your current policy any time.

And, it's probably cheaper to buy it from your insurance carrier.

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