New Car Owners Could Fall into Insurance Gap

In 2009, the government offered unprecedented incentives to buy new cars. First, qualified taxpayers were allowed to deduct from their income taxes the sales tax on a new car purchase. Then there was the tempting “cash-for-clunkers” credit (up to $4,500) that was claimed by nearly 700,000 car buyers in July and August.¹

Overall, Americans bought 12.3 million new cars and trucks in the first eleven months of 2009.²

If you bought a new car in 2009, it’s safe to say it has already depreciated significantly since you first drove it home. That’s why it is important to understand that if your automobile were to be stolen or totaled in an accident, your insurance company might repay you only for the vehicle’s depreciated actual cash value.

GAP (Guaranteed Auto Protection) insurance, also known as guaranteed asset protection, may be useful to cover any difference between the insured value of your car and what you owe on a loan or lease, up to the policy limits. Here’s how GAP insurance would work in the event that your auto were to end up wrecked or stolen.

Automobiles can depreciate quickly — 20 percent or more in a matter of months — and used-car values can drop depending on market forces. Consider a painful scenario in which a car buyer pays $30,000 for a new vehicle. If it is totaled several months later, the insurance company could determine that the current book value is only $24,000. Potentially, the owner would owe the lender the nearly $6,000 difference for a car he or she can no longer drive.

If any of the following situations apply, you are more likely to need GAP insurance:

• Your vehicle is less than three years old.
• You are leasing a vehicle and the contract does not include a gap waiver.
• You financed your car for more than four years or did not make a large down payment at the time of purchase.
• Debt from a prior auto was incorporated into your current loan.

Generally, a vehicle must first be covered under your Comprehensive and Collision coverage and must also be declared a total loss for any GAP insurance to take effect.

Although it is often possible to purchase GAP insurance through the car dealer, it is typically less expensive when purchased privately through your insurance agent. If you bought a new car recently or plan to do so in the near future, you might consider reviewing your auto policy with your agent to determine whether purchasing additional GAP insurance might be an appropriate move for you.

1) U.S. Department of Transportation, 2009
2) The Wall Street Journal, December 1, 2009

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.