Loan Payoff Insurance
How do I protect myself with loan payoff insurance?
When you take out an auto loan, you take a gamble on being able to pay it back. The gamble that your car will survive the life of the loan, and that it won’t be stolen six weeks after you buy it. Loan payoff insurance coverage mitigates that gamble, at least to some extent.
Also called GAP insurance, loan payoff insurance coverage helps reduce the financial burden of being upside down on a car note. In other words, if you owe more money on the car than it is worth, you can purchase additional insurance to cover that disparity. That way, if your vehicle is damaged beyond repair or stolen, or otherwise considered a total loss, you won’t have to pay the balance left on your auto loan.
Assessing New Car Insurance Needs
Everyone doesn’t need loan payoff insurance coverage. If you make a healthy down payment and pay off your new car quickly, that additional coverage might be superfluous. The only way to know, however, is to keep track of how much your vehicle is worth compared to what you owe.
Every month, you should get statements from the financing company showing what you’ve paid and how much you have left to cover. Armed with this knowledge, check the Kelley Blue Book value of your vehicle every couple months to keep on top of things. If you owe more than the blue-book value, consider buying loan payoff insurance.
A Great Deal Might Be Anything But
A friend of mine bought a car over the Christmas holidays, timing his purchase so it coincided with the myriad deals on vehicles and financing the dealerships run that time of year. He was excited to discover that his payments every month would be much less than he’d expected.
He added loan payoff insurance coverage to the car, however, which increased his premiums somewhat. The added expense was worth it to him because, with the low payments, it would take him longer to get over the “hump” of depreciation as the car aged.
Most people realize that cars depreciate as soon as their tires touch the road, but many don’t realize the true extent of that depreciation. It is entirely possible to buy a new car and automatically owe more on it than it’s worth. If you don’t make a significant down payment, loan payoff insurance coverage is a must.
How Loan Payoff Insurance Coverage Works
Loan payoff insurance coverage is one type of supplemental insurance plan available from most insurance providers. If you purchased a car with a loan from a financial institution, you may be eligible to apply for this type of insurance coverage. Loan payoff insurance coverage is often included in lease agreements, so make sure to check with your dealer to find out if you have this extra benefit before you sign your lease papers.
Loan payoff insurance coverage pays for a portion of the value of your vehicle in the event of an accident, theft or vandalism. The amount you receive is determined by the deductible limits of your collision and comprehensive insurance coverage and the amount you still owe on your new car loan or lease agreement.
It’s important to remember that loan payoff insurance coverage only pays the difference between what you still owe on the vehicle and what the insurance company will pay, minus the deductibles on your comprehensive and collision car insurance. The amount you receive will also be no more than 25 percent of the actual cash value of your new car.
You can purchase loan payoff insurance coverage from the same insurance company or agent providing you with collision insurance and comprehensive insurance coverage. In the event of an accident or incident that requires filing a claim, working with the same company makes it easier to process the claim and be reimbursed in a timely manner.
Evaluating Your Options
In order to purchase loan payoff insurance coverage, you must be eligible for it based on your insurance company’s requirements. According to CarInsurance.com, you must have purchased both collision and comprehensive coverage in order to buy loan payoff coverage. Furthermore, there must be a lien on the car by your financing company. If you’re financing through a private party, such as a parent, it won’t be applicable.
Loan payoff insurance coverage is not necessary for all situations, but it helps to know your options. As soon as you buy a new car, determine whether GAP insurance is needed. Then continue evaluating your needs every few months until the loan is paid off.
Reasons for getting Loan Payoff Insurance Coverage
Even though you may have purchased comprehensive car insurance and collision car insurance coverage for your vehicle. Loan payoff insurance coverage ensures that you will not owe money on a vehicle that no longer has a cash value. Reasons, why you may need to purchase this type of insurance coverage, include:
- Taking out an extended auto loan, which means you are making higher than average payments.
- Choosing a vehicle with a very high depreciation value.
- Making a minimal down payment on your new car.
- Having a poor credit history and carrying a loan that has a very high interest rate.
- Financial protection if your new car gets damaged or is stolen.
- Financial protection in the event that the value of your vehicle is less than the balance of your car loan.