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Car insurance is an important consideration when you’re purchasing or leasing a vehicle. This is an ongoing expense that you must factor into your budget to make sure you can comfortably afford the vehicle that you’re interested in. While you’re required to carry the state’s minimum coverage, you should also explore additional coverage options, as these provide added protection should something happen to your vehicle.

What is Gap Insurance?

Guaranteed asset protection (gap) insurance provides coverage for a vehicle that’s totaled or stolen while there is still an outstanding balance on its loan or lease. Most lenders require full coverage for a vehicle with a lease or loan, which includes liability, collision, and comprehensive insurance. Gap insurance, however, is optional. With collision and comprehensive insurance in place, your insurance provider can offer gap insurance as an added protection to help you with the expense of settling your loan or lease when the vehicle is no longer drivable.

gap insurance in Chicago

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How Does Gap Insurance Work?

Gap insurance comes into play after your collision and comprehensive insurance have paid up. These types of insurance will cover the following:

  • Collision coverage: Pays for vehicle damage caused by a single-car rollover accident or collision with another vehicle or object. 
  • Comprehensive coverage: Pays for non-collision vehicle damage caused by fires, natural disasters, falling objects, or animals. Comprehensive coverage also pays for the current value of your vehicle if it’s stolen.

Your collision and comprehensive coverage will typically have a deductible. This is the amount that you’re required to pay on your own before your insurance comes into play. For example, if you have a $1,000 deductible on a car that’s valued at $15,000 and is totaled, you will pay the first $1,000 yourself and receive $14,000 to cover the remainder of your loss. However, you may actually owe more than $15,000 on your vehicle due to depreciation.

Gap insurance will go into effect at this point to help you cover the remaining difference. If you owe $20,000 on your auto loan for a vehicle currently valued at $15,000, gap insurance will pay the $5,000 difference. Some types of gap insurance will also cover your deductible. If you have gap insurance that pays for your deductible, you would receive $6,000 in the example above.

What Gap Insurance Does Not Cover

Gap insurance offers valuable coverage when your vehicle is considered a total loss. However, this insurance doesn’t fill in every possible gap, as some may think. Gap insurance does NOT pay for:

  • Vehicle repairs.
  • A car rental while your car is being repaired.
  • The down payment on a new vehicle.
  • Carry-over balances on loans rolled into your car loan.
  • Extended warranties on your car loan.

Gap insurance also will not help if you’re unable to make your car payments. It offers no assistance in the event of disability, job loss, financial hardship, or death. If you fail to make your car payments and the vehicle is repossessed, gap insurance will not reimburse you for the loss.

Gap Insurance and Vehicle Depreciation

Gap insurance is a smart choice if you’re in a situation where you owe more on your vehicle than what it’s worth. This situation can occur fairly easily because vehicles depreciate fast. Keep these facts in mind:

  • A new vehicle loses about 10% of its value as soon as it’s driven off the lot. A car that you purchase for $30,000 is only worth $27,000 by the time you get it home.
  • Within the first year, a new vehicle loses around 20% of its value. That $30,000 vehicle is only worth $24,000 after 12 months.
  • New vehicles continue to depreciate by about 15% to 25% annually until they’re five years old. The car you purchased for $30,000 may only have a value of $12,530 after five years.

Research the make and model of your vehicle for a more specific idea of its depreciation. Actual five-year depreciation can vary dramatically from around 27% on a car that holds its value well to as much as 71% on a car that loses value quickly. If you purchase a used vehicle that’s at least five years old, it will depreciate much slower.

You can determine the difference between your car’s value and the remaining balance on your auto loan at any time by looking up the current fair market value for your vehicle and subtracting this from what you still owe. If you have a lease, payments do go down as the vehicle depreciates, but you’re still required to pay for your vehicle through the entire term of the lease agreement, even if it’s stolen or totaled.

When to Get Gap Insurance

You should typically carry gap insurance any time the difference between your loan or lease balance and car value is more than you can comfortably cover. Gap insurance is especially useful if:

  • You have a long-loan term that’s 60 months or more.
  • You made a down payment of less than 20% on your vehicle.
  • Your vehicle’s make and model depreciates faster than the average.
  • You lease your vehicle.

Keep in mind that your automobile loan is for more than just the value of your vehicle. You’re also paying interest, so the loan is more than the vehicle’s value from the moment you make this purchase. If you have a lease, a money factor is added, which is similar to an interest rate. This is often called a “lease charge” or “rent charge” on your lease agreement.

Is Gap Insurance Required in Illinois?

The state of Illinois does not require gap insurance. The mandatory insurance law for the state requires only that you carry liability insurance in the amount of:

  • $20,000 for damage to the property of another person.
  • $25,000 for injury or death of another person in an accident.
  • $50,000 for injury or death of more than one person in an accident.

While gap insurance is not required, it’s a smart choice for many drivers. Contact American Auto Insurance to learn more about your coverage options and discuss whether gap insurance is the right choice for you.