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Car Insurance, all you want to know

May 7, 2022
Car Insurance, all you want to know

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Car Insurance, all you want to know

 

How Much Does Car Insurance Cost, and How Can I Lower My Rates?

Consider these factors to lower your car insurance rates. Plus: How to get coverage for a 16-year-old driver.

 

How Much Does Car Insurance Cost What Can Lower My Rates

Monthly car expenses are second only to housing costs in most household budgets, but we have good news: There are plenty of effective ways to lower your car insurance premiums even as prices rise. Just be careful: You’ll want to make sure you still have the coverage you need.

Keep reading for our tips on how to lower car insurance rates as well as how much coverage actually costs.

This article will cover:

  • Factors that impact the cost of car insurance
  • The average cost of car insurance
  • What can lower your car insurance rates
  • How to get coverage for a 16-year-old driver

 

How Much Does Car Insurance Cost?

According to a 2021 Your Driving Costs study from AAA, the cost to insure a 2021 vehicle with full coverage is $1,342 annually. Full coverage includes physical damage coverage as well as liability coverage and medical insurance (where required).

However, rates can vary by location and other factors, sometimes dramatically. AAA’s study compiled average rates for drivers that fit a certain profile, which brings some advantageous rating factors.

In the AAA study, the insured drivers were:

  • Under 65 years of age
  • Experienced drivers with over six years of driving history
  • Accident-free
  • Insuring a late model car

Let’s consider each of these rating factors to better understand how rates might vary for drivers with different characteristics.

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Driver Age

Age can play a role in auto insurance rates, with younger and older drivers paying higher premiums. Some insurers increase auto insurance rates beginning at age 70 to 75. At the other end of the spectrum, drivers under age 25 often pay more for coverage, as well.

Driving Experience

Driving experience also plays a role in rates. Some insurers won’t insure a driver with less than three years of experience unless they are added to the policy of a more experienced driver. Others may insure newer drivers, but the experience can be costlier before reaching the three-year threshold.

Accident History

Your recent accident history affects insurance rates. If you haven’t had a recent accident, you can expect lower rates—assuming all other rating factors are equal. From an insurer’s standpoint, everyone is risky, but they aren’t quite sure how risky we are. Until we have an accident, that is. Then, they know. Accidents can lead to higher rates for three to five years.

Location

Where you live can affect car insurance rates. While there are often significant differences in cost from one state to the next, AAA’s study was based on drivers in urban and suburban areas. This rating factor can go either way. Drivers in urban areas often pay more than drivers in suburban areas, and rural drivers often pay lower premiums than the first two groups.

In this case, insurers are looking at traffic density as well as other risks such as theft and vandalism. However, rather than examining where you drive, insurers typically consider garaging location, with the assumption that much of your driving will be close to where you park your car at night. Someone who lives in the suburbs and commutes into the city may pay lower rates compared to someone who lives and works in the city.

Age And Value Of The Car

In AAA’s study, the drivers insured a 2021 model year car. Newer vehicles can cost more to insure because they are worth more. However, sometimes safety features available on newer vehicles can help offset the cost of insuring a more valuable car. Some insurers also offer a new-car discount.

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Average Car Insurance Cost Per NAIC

The $1,342 average car insurance cost serves as a helpful reference point if you’re considering a late-model car. But many households have vehicles of various ages, sometimes with different insurance requirements.

For example, if you have an older vehicle that’s paid off, you might not need to carry physical damage coverage.

The National Association of Insurance Commissioners (NAIC) also puts out a report on auto insurance costs, breaking out the cost by state and insurance type.

Here are the national car insurance average premiums for 2019 per the NAIC:

  • Liability Average Premium: $650
  • Collision Insurance: $381
  • Comprehensive Insurance: $172
  • Combined Average Premium: $1204
  • Average Expenditure: $1,070

Here’s what these categories represent:

Auto liability insurance covers our financial responsibility to others for auto-related injuries or damage to the property of others. Both collision insurance and comprehensive insurance provide protection for physical damage to your own vehicle.

The combined average premium refers to full coverage, which includes required liability coverage and physical damage coverage. Some states require medical coverage, as well. Over a dozen states also require uninsured/underinsured motorist protection.

Average expenditure refers to the average amount insured drivers pay. Not all vehicles require full coverage, so the average expenditure is lower than the combined average premium for full coverage.

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What Can Lower My Car Insurance Rates?

Insurance premiums reflect the risk of a claim, which can come from several areas. Some are broad risks, such as traffic density in your location. But rates also reflect the risk we bring individually.

While you can’t negotiate your rates with insurers, you may be able to capture some discounts that can reduce your overall cost of coverage. Good driving habits can also help keep rates lower.

Each insurer offers its own assortment of discounts, but many times insurance companies follow a similar blueprint. Here are some of the commonly available discounts to help reduce your overall insurance costs.

  • Multi-policy: Many insurers offer a discount for buying both home and auto insurance.
  • Multi-vehicle: Savings from multi-vehicle discounts can add up quickly because each vehicle on your policy earns a discount.
  • Defensive driving: By completing an approved defensive driving course, you can earn a discount good for up to three years.
  • Accident-free: Many insurance companies offer extra savings for staying accident-free.
  • Safe driver: A safe driver discount may consider your accident record as well but usually focuses savings on drivers with no moving violations.
  • Low mileage: Fewer miles driven means less risk. Many insurers offer a discount for drivers who drive less than 7,500 miles per year.
  • Early signing: If you don’t need coverage right away, you might be able to save money by signing up for coverage seven or more days before your effective date.
  • Payment discounts: Save money with discounts for pay-in-full, automatic payment, or paperless billing.
  • Homeowner: Many insurers offer a discount to homeowners, separate from the discount for buying home and auto insurance together.
  • Safety-related: Earn a discount for the features your car has, including antilock brakes, anti-theft protection, daytime running lights, and passive restraints (airbags and seatbelts). Some insurers also offer a discount for new car buyers.
  • Usage-based discounts: More insurers are offering usage-based discounts. The technology behind this is called telematics and utilizes an in-car device to measure miles traveled, time of day, and other driving metrics to reward lower-risk drivers with money-saving discounts.
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What Other Factors Affect Car Insurance Rates?

Auto insurance rates consider more than just your driving history. The coverage limits and types of coverage you choose also affect costs. However, before you take a pruning shear to your policy limits, consider other factors that can affect your insurance costs. In the end, your coverage limits protect you and your family, so higher limits can be a wiser choice for some.

Below are some actionable factors that can affect auto insurance rates.

  • Credit score: In most states, auto insurance providers can use your credit history as a rating factor for car insurance. If your credit score could use a tune-up, taking steps to improve your credit history could lead to insurance savings, as well.
  • Traffic tickets: Moving violations can end up costing more than just the cost of the fine. Tickets for moving violations can cause you to lose a safe driving discount or even result in a surcharge that can last for years.
  • Annual mileage: Fewer miles driven translate to less risk of a claim.
  • Car make and model: The cost to insure a Tesla Model S can be more than double the cost to insure Honda CR-V. Before driving home in a car you fell in love with at the dealership, research the cost for insurance.
  • Continuous coverage: Sometimes you’ll earn better rates if you’ve had continuous coverage for three years or longer. A break in coverage of just one day can lead to higher insurance costs for years to come. Take steps to be sure coverage doesn’t lapse and when changing insurers don’t cancel the old policy until after the effective date and time for the new policy.
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How To Get Coverage For A 16-Year-Old Driver

Car insurance costs can change dramatically if you have a young driver in your household.

If your new driver doesn’t yet have a license, you may not need to add them to your policy when they still have a learner’s permit. Your policy covers them under what’s known as permissive use. To be safe, reach out to your insurer to ask about their process and requirements for drivers with a learner’s permit.

However, you’ll definitely need to add your teen driver to your policy when they pass their driving test. Alternatively, some families encourage young drivers to get their own policy.

Adding your teen driver to your own policy is almost always the most affordable way to go. However, who owns the car also plays a role. If you own the car, the policy must be in your name. If your teen driver owns the car, the insurance needs to go in their name. If both names are on the title, you have some flexibility and can insure the car in either name.

When the day comes to add your 16- or 17-year-old to your policy, here are some discounts to ask about:

  • Good student discount: Many insurers offer good student discounts for students with As and Bs.
  • Student-away-at-school discount: Young drivers away at college can save on coverage if the car stays home and the school is far enough away (usually 100 miles).
  • Driver’s education discount: Many states offer driver’s education for students. Discounts for driver’s education are common.
  • Defensive driving course discount: Separate from a driver’s education discount, many insurers also offer a discount for completing an approved defensive driving course. Typically, these courses only cost about $20 to $30 and can provide savings for up to three years.
  • Telematics-based discounts: Many insurers now offer in-car devices that measure speed, braking, starts, cornering, and other metrics that concern driving safety. In many cases, you’ll earn an instant discount for participating with future discounts based on safe driving.

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Getting A Handle On Car Insurance Costs

Car insurance premiums are among the biggest bills each month for many households, but there are several ways to save without sacrificing the coverage you need.

Most insurers recommend a policy review once every 12 to 18 months. If you haven’t reviewed your coverage lately, reach out to your insurer to discuss ways to save. If you’re shopping for new coverage, be sure to ask your new provider which discounts are available and how you can qualify.

How Does Car Insurance Work? Here’s Our Guide for Everything You Need to Know

How does car insurance work? Here’s our guide for everything you need to know

 

01 MT How Does Car Insurance Work

Nearly 230 million licensed drivers travel American roadways throughout the U.S., but most of the ones with car insurance probably don’t understand their coverage. The truth is that insurance policies make for dull reading, but we can help.

Instead of rolling out a whole policy, we’ll focus on the basics you should know about car insurance. With a better understanding of how each element of your car insurance works, you can make a well-educated  buying decision, protecting your vehicle while also safeguarding against liability risks.

This article will cover:

  • The basics on car insurance
  • Car insurance coverage types
  • Car insurance coverage limits
  • Car insurance deductibles
  • Exclusions
  • Why car insurance is important

 

Car Insurance In A Nutshell

At its simplest level, insurance is the transfer of risk. In the case of auto insurance, we’re transferring risk away from ourselves as individuals to an insured group. The policyholders for an individual insurance company are the insured group.

We all pay premiums, but we won’t all have a loss simultaneously.

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At an individual level, it’s impossible to predict if or when we’ll have a loss. We also don’t know how much it will cost. However, when insuring through a larger group, we can put probability and statistics to work to determine how much each insured person should pay to cover the collective risk for the group.

The premiums we pay cover the claims for those within the insured group when they have a loss.

If or when we have a loss ourselves, the premiums paid by the insured group cover our losses —but only for coverage types we’ve purchased with the policy. For example, if you don’t have collision coverage for your car, your policy can’t help pay for repairs to your car when you are at fault.

A recent study from AAA estimated the average cost for insuring a new car at $1,342 per year. Your actual premiums will vary based on many factors including the coverages you select, but this figure offers a helpful way to understand how premiums pay for claims.

AAA’s average car insurance cost includes full coverage for a 2021 model vehicle. The $1,342 average cost represents an average for drivers under age 65 who live in the suburbs and have a clean accident history.

The Insurance Information Institute (III) reports the following average loss amounts for 2020:

  • Bodily injury liability: $20,235
  • Property damage liability: $4,711
  • Collision: $3,588
  • Comprehensive: $1,995

Although $1,342 can seem like a lot to pay for car insurance (on average), the number pales in comparison to the average bodily injury liability claim at over $20,000. It’s also worth noting that many accidents resulting in injuries can be much costlier.

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The many policyholders paying $1,342 each year make it possible to cover the claim for over $20,000 in this example.

That $1,342 average premium is also well below the average loss for property damage liability, collision damage, or comprehensive claims.

Auto Insurance Coverage Types

Lenders usually require physical damage coverage, but individual states focus car insurance requirements on liability coverage.

Requirements and available coverages can also vary by state, but coverage types fall into the categories below.

Physical Damage Coverage

Both collision and comprehensive insurance fall under physical damage coverage. Collision claims averaged $3,588, while comprehensive claims averaged $1,995 in 2020, according to III data.

  • Collision: Your collision coverage pays for damage caused by contact with another vehicle or a stationary object. It also covers damage due to vehicle rollovers.
  • Comprehensive: Also called other-than-collision coverage, comprehensive insurance pays for damage caused by reasons other than collision. This can include vandalism, glass damage, theft, falling (or flying) objects, fires, floods, and more. Damage caused by animals also falls under comprehensive coverage.

Physical damage coverage is not required by law. However, lenders and leasing companies typically require physical damage coverage as an auto loan or lease condition.

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From a lender’s perspective, at least part of the car still belongs to them. Physical damage coverage protects the lender’s financial interest in the vehicle but also protects the policyholder from financial losses due to damage.

Full-coverage auto insurance refers to physical damage coverage combined with required coverages, such as auto liability or medical insurance.

Liability Insurance

Most states require drivers to carry auto insurance, and auto liability insurance is one type of coverage required by law. Liability refers to our financial responsibility to others.

For example, let’s say you accidentally hit the car in front of you at a stoplight. In most situations, you’d be found at fault in that accident, likely causing you to become liable for damage to the other vehicle or injuries caused to the occupants of the other vehicle.

Recent statistics from the National Highway Traffic Safety Administration show nearly two million auto-related accidents per year that result in injuries. The III reports an average claim amount of over $20,000 for bodily injury liability claims and nearly $5,000 for property damage claims.

The numbers can add up quickly, especially for injuries, which is why most states require drivers to carry coverage.

Auto liability insurance covers two specific risks:

  • Bodily injury liability
  • Property damage liability

Although bodily injury liability is largely self-explanatory, property damage liability isn’t always well understood. Property damage liability pays for damage to the property of others. This can include other cars as well as street signs, guard rails, traffic lamps, or even buildings.

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Liability insurance requirements vary by state, but it’s often best to choose a coverage limit above the minimum state requirements.

For example, in New Jersey and a few other states, the minimum requirements are as follow:

  • Bodily injury liability (per person): $15,000
  • Bodily injury liability (per occurrence): $30,000
  • Property damage liability (per occurrence): $5,000

New Jersey’s required bodily injury liability coverage per person is lower than the average claim amount of over $20,000, according to III data. The other factor to bear in mind is that the III figures are average claim amounts. Some claims reach totals much higher than average.

State minimum coverage limits may not be enough to protect you financially. Fortunately, you can choose higher liability coverage limits.

Medical Coverage

Car insurance is governed at the state level. While most elements of an auto policy are similar from one state to the next, each state sets its own requirements. Medical coverage is the area in which states tend to differ from their neighbors.

Some states require medical coverage for you and your passengers; others do not.

Medical coverage options also vary by state, with some states offering personal injury protection (PIP) and others offering medical payments (med pay) coverage.

These options provide a way to pay for medical needs for you or your passengers if injured in a car accident.

Of the two, med pay is the simpler structure and pays for medical expenses if you are at fault in an accident, up to the coverage limit you choose. If you are not at fault, the other driver’s liability insurance should cover your medical expenses.

By comparison, PIP pays for medical expenses regardless of who is at fault in an accident. PIP also extends coverage options to include additional costs such as lost wages and other expenses directly caused by an auto-related injury.

Uninsured Motorist (UM) And Underinsured Motorist (UIM) Protection

Percentages vary wildly by state, with Mississippi having the highest percentage of uninsured drivers (29.4 percent in 2019) and New Jersey having the lowest (3.9 percent). Overall, the Insurance Research Council says that about 1 in 8 drivers is uninsured.

A higher number of drivers likely don’t have enough coverage. These drivers are referred to as underinsured motorists. The tricky part of the calculation is that we often don’t realize we are underinsured until faced with a loss that exceeds our coverage limits.

Uninsured and underinsured motorist protection, required in some states, offers a way for your own insurance policy to provide coverage if an uninsured or underinsured driver causes a loss they can’t cover.

Where required, you may need to carry the same coverage limits you choose for your liability coverage. In effect, UM and UIM provide protection for you, even though the coverage is triggered by the liability of other drivers (and their inability to cover that liability through an insurance policy).

Add-Ons And Riders

Most car insurance policies also offer add-ons or options. You’ll often see some of these referred to as riders or endorsements. However, some might actually be separate products that are billed with your premium but are not part of an insurance policy.

Here are some of the most common car insurance add-ons:

  • Rental reimbursement: If a covered claim forces you to rent a replacement car, rental reimbursement coverage can help pay for your rental.
  • Rideshare endorsement: If you drive for a ride-hailing company such as Uber or Lyft, this endorsement can fill a gap in coverage when you are logged into the app but don’t yet have a passenger.
  • Gap insurance: This can pay for the difference between your car’s insured value and the amount you still owe the lender if you have a total loss.
  • Roadside assistance: Many insurers offer roadside repairs, towing, jump starts, or fuel delivery.
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Car Insurance Coverage Limits

Your car insurance policy provides protection up to the coverage limits you’ve chosen, but two types of coverage are determined by market value instead. On a standard auto insurance policy, both collision and comprehensive insurance use your vehicle’s value as a coverage limit.

  • Physical damage coverage limits: As your vehicle falls in value over time, your coverage limit for your vehicle also decreases. In effect, the insurer is insuring your actual loss (the depreciated value) rather than your replacement cost (the cost to replace your vehicle).
  • Liability coverage limits: While your state sets the minimum required liability limits, you can choose higher limits or even boost your coverage through an umbrella policy. A liability judgment doesn’t consider whether you have enough money to pay for damage or injuries. Instead, your financial liability due to an auto accident can affect savings or future earnings.
  • Medical coverage limits: Medical coverage options vary by state, and some states require a minimum level of coverage. However, you may be able to use your existing health insurance coverage as a primary provider in some cases, which can reduce your overall auto insurance costs.

 

Car Insurance Deductibles

Like many other types of insurance, car insurance uses deductibles to keep premiums more affordable for everyone. As the name suggests, the deductible is “deducted” from your claim settlement. However, not all coverage types use deductibles. For example, liability coverage does not use a deductible.

Choose a deductible you can afford to pay for collision and comprehensive insurance. Medical coverage may also use a deductible.

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Car Insurance Exclusions

Car insurance policies don’t cover everything. Your policy also has a section that details coverage exclusions. These exclusions can vary by insurer but usually follow a similar pattern.

  • Business use: Personal insurance policies draw the line at business risks. If you’re using your vehicle to make money, discuss your coverage needs with a trusted agent. In many cases, you can add a rider to provide coverage for your specific use case.
  • Racing: Auto insurance policies don’t cover claims related to racing.
  • Illegal acts: Similarly, auto insurance policies don’t cover claims that result from illegal acts. When you watch movies with bank robbers driving away from the scene, they aren’t covered by their auto policy, although that may be the least of their worries.
  • Mechanical failure or wear and tear: Car insurance policies don’t cover wear and tear or mechanical failure. Instead, consider building a savings account for the expenses that arise as your vehicle ages.

 

How Your Car Insurance Policy Protects You

We all grumble when the car insurance bill arrives, but your policy can protect you in ways that aren’t always obvious. With full coverage, you can protect both your car and your finances by insuring against impossible-to-predict liabilities.

It’s wise to review your coverage about once per year with a trusted agent. Life changes and your coverage might need to change as well.

Take the opportunity to occasionally compare rates, as well. Although car insurance companies use similar factors to determine rates, each company might weigh these factors differently.

Car insurance can seem expensive, especially if you haven’t had a claim recently. But not having coverage that’s well matched to your needs can be much costlier.

What Is Gap Insurance? And What Does It Actually Stand For?

How does gap insurance differ from car insurance?

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If you’ve ever spent a Saturday afternoon in a car dealer’s financing office, you’ve probably heard of gap insurance. But maybe you didn’t fully know what it meant. If so, you’re not alone. In simple terms, gap insurance—short for Guaranteed Asset Protection—can cover the gap between the insurance payout (in the event of a total loss) and the amount you still owe on the vehicle. Often, the difference between these numbers can be a wide gap to fill, possibly thousands of dollars.

Here’s what you need to know about gap insurance before you sign on the dotted line.

Why Would There Be A Gap?

To better understand the role of gap insurance, it’s helpful to know why there might be a gap at all.

Two key numbers are at play: Your loan balance and the car’s insured value. Both go down over time, but not at the same rate. The loan balance changes as you make payments, but a greater percentage goes to interest at the beginning of the loan.

The insured value tracks the car’s market value. Insurers may use their own tools to determine value, but you can use the trim selector on our Buyer’s Guide model pages or NADA to approximate your car’s market value.

Before the market turned upside down with demand for new cars far outstripping supply, a new vehicle’s value could be expected to fall by 20 to 30 percent in the first year. So, if you bought a $40,000 vehicle during a time when parts shortages are not as much of an issue, it might be worth about $8,000 less within a year, making its value $32,000.

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Let’s say that about a year after buying your new car, you’re involved in an accident where you are at fault. Fortunately, you have collision coverage, so the insurer will help pay for the repairs. However, the value of the vehicle will determine how much the insurer will pay or whether they will repair the car at all.

It isn’t unusual for an insurer to deem a vehicle as a total loss once the repair estimate reaches 70 to 80 percent of the car’s insured value. Auto body shops often find additional damage once they take the car apart to make repairs, driving up the total cost of repairs.

For your (now) $32,000 car, that means if the repair estimate exceeds about $22,000, the insurer might call the vehicle a total loss.

If the car is a total loss, the insurer cuts a check for the insured value, probably about $32,000 in this example, less your deductible. The deductible is the part of the claim you pay. Often, collision insurance deductibles are between $500 and $1,000. Let’s say you chose a $1,000 deductible. In this example, the insurer will pay $31,000.

Now, let’s see how this amount compares to your loan balance.

Comparing An Insurance Payout To The Loan Balance

When you bought your car, you financed the $40,000 purchase at 5 percent with a 72-month loan. Your trade-in covered tax and tags. After 12 months of making payments, the auto loan balance is about $34,000.

There’s a $3,000 gap between the insurance payout ($31,000) and the amount you still owe ($34,000).

This example is one of the less problematic scenarios, however. If the car you choose depreciates faster or you pay a premium over the market price or a higher interest rate, the gap can be much wider.

Without gap insurance, you may still have a balance from the totaled car at the same time you need to buy a new car.

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Gap Insurance Isn’t Car Insurance

Some auto insurance companies offer gap insurance, but gap insurance isn’t part of a standard auto insurance policy. Instead, it’s an add-on that can fill a gap if your car is totaled and the claim payout is less than your loan balance.

While not a part of your auto insurance policy, your gap insurance complements two coverages on your auto policy: collision insurance and comprehensive insurance.

Both of these coverage types address physical damage to your vehicle.

  • Collision coverage pays for damage to your vehicle when you are at fault in an accident.
  • Comprehensive insurance pays for many other types of physical damage, including fires, floods, glass damage, vandalism, and theft.

If either of these coverages is triggered and the insurer deems the vehicle to be a total loss, gap insurance can cover the difference between your insurance payout and the amount you still owe on the vehicle.

Is Gap Insurance Part Of Full Coverage?

Full coverage auto insurance includes liability insurance, medical coverage (where required), and physical damage coverage. However, gap insurance is a separate product and is not automatically included with a full coverage auto policy.

Even if you have full coverage, gap insurance can be a wise choice in certain situations, such as when you have little equity or negative equity in the vehicle. Negative equity, also called being “upside down” in the loan, refers to owing more than the vehicle is worth.

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Where Can I Get Gap Insurance?

You can purchase gap insurance through dealers and lenders or through insurance companies. When buying through a dealer or lender, you’ll often pay a fixed amount for your gap insurance. With an insurance company, you’ll often pay for your gap insurance coverage annually or along with a six-month auto insurance policy.

Your choices for buying gap insurance include:

  • Your lender
  • An aftermarket gap insurance provider
  • Your auto insurance provider

Costs and cancellation rules can differ depending on where you buy your coverage. If you keep the car and continue making payments, you’ll owe less than it’s worth at some point. This means you won’t need gap insurance forever.

You might find purchasing gap insurance through your insurer to be both more affordable because you won’t pay interest on your gap coverage and easier to cancel when the time to cancel arrives.

How Much Does Gap Insurance Cost?

If you buy gap insurance from the dealership, your cost could be as high as $700. Stand-alone gap insurance policies often cost less but can still cost up to $300.

In many cases, the most affordable way to purchase gap insurance is through your auto insurance company. If your insurer offers coverage, you can often add gap insurance coverage for between $20 to $40 per year, according to the Insurance Information Institute.

Gap coverage costs through an insurer may consider your claims history or other factors. In contrast, gap insurance purchased through a lender often uses a flat-fee model based on the vehicle’s value.

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If you only need gap insurance for a few years, adding gap coverage through your auto insurance provider may offer the most affordable solution. However, not all insurers provide gap coverage.

Here are some well-known insurers that offer gap insurance:

  • AAA Insurance
  • Liberty Mutual Insurance
  • AARP/The Hartford Insurance
  • Allstate Insurance (sold through authorized dealers)

When you no longer need gap coverage, you can contact your insurer to cancel that part of your coverage while still keeping other coverages such as collision or comprehensive insurance.

How Much Does Gap Insurance Cover?

As with other financial products, it pays to read the fine print for your gap insurance. Some gap insurance policies cover up to $50,000, while others use a percentage of your vehicle’s actual cash value (ACV). Actual cash value refers to the depreciated value of your car rather than its replacement cost.

When buying gap insurance, be certain that the coverage amount is enough to cover the difference between your loan balance and your car’s insured value during the first few years of ownership or until you reach positive equity in the vehicle.

Who Might Need Gap Insurance?

If you put down 20 percent or more on your vehicle, you may not need gap insurance. But for many buyers, gap insurance offers an additional layer of financial safety.

  • Auto lessees: If you’re leasing your vehicle, don’t be surprised to find a gap insurance provision built into the lease.
  • Low or no-money-down buyers: The lender may require gap insurance if you’re financing with a low down payment. Even when not required, gap insurance can make sense because you could be upside down in the loan as soon as you drive off the lot.
  • Loan rollovers: Some buyers qualify for loans that allow them to roll over the balance from their trade into a loan for a new car. In this situation, you’re upside down as soon as you sign the loan papers. Gap insurance can help cover the potential loss if the new car gets totaled or is stolen.
  • Owners of cars that depreciate quickly: Some makes and models depreciate faster than others. See the full list built with IntelliChoice data right here.
  • High-mileage drivers: If you drive for work or find other ways to rack up higher-than-average miles, your car’s value can fall more rapidly.
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Does Gap Insurance Cover Theft?

Gap insurance itself doesn’t cover theft. Your comprehensive insurance does that. Instead, gap insurance can cover the gap between the amount your insurer pays for your stolen vehicle and the amount you still owe.

However, if you don’t have comprehensive insurance or you choose to cancel your comp coverage, your gap insurance won’t cover your loss. In effect, gap insurance acts as secondary insurance that complements your physical damage insurance. But if there is no primary coverage, gap insurance can’t assume a primary role.

When Can You Cancel Gap Insurance?

You don’t need to carry gap insurance indefinitely. As a financial tool, gap insurance only makes sense when there’s a gap to cover.

Keep an eye on your loan statements to see your current auto loan balance. At the same time, check the value of your vehicle to determine when you can cancel your gap insurance. When you’re certain you owe less than the car is worth, gap insurance is no longer needed.

However, you may want to wait until you have a buffer of $1,000 or more just in case your estimates aren’t 100% accurate.

Gap Insurance Is Optional (But Required By Some Lenders)

Although most states require auto insurance, gap insurance isn’t required at a state level. However, in some cases, lenders may require gap insurance.

For example, when leasing a vehicle, the leasing agreement may include a gap insurance requirement. Also, lenders might require gap insurance if you don’t put much money down when purchasing a vehicle or if you choose a longer loan term like 72 months.

Should I Buy Gap Insurance?

Unless required as a loan or lease condition, the decision to buy gap insurance is completely yours. If you made a sizable down payment when buying your car, you may not need it at all. But some vehicles depreciate very quickly, possibly outpacing the down payment you made, so it’s best to make the decision on a case-by-case basis.

If you decide to purchase gap insurance, try to do it on your terms. The most affordable route may be buying coverage through an insurance provider rather than a dealer or lender.

What Is an Extended Car Warranty? And What Does It Cover?

Everything you need to know about extended car warranties in one place.

 

What Is an Extended Car Warranty And What Does It Cover

What’s peace of mind worth to you? An extended car warranty can be just the thing to keep drivers from worrying about unexpected automotive costs down the road. When a new car’s warranty has lapsed, an extended car warranty is one option that some may find worth the investment. Here’s what you should know about extended car warranties.

This article will cover:

  • What is a car warranty?
  • What is covered in a car warranty?
  • What is an extended car warranty?
  • What is the difference between car insurance and an extended car warranty?
  • What does an extended car warranty cover?
  • Who offers extended car warranties?

What Is A Car Warranty?

A car warranty is a promise from the automaker that the vehicle’s specific components will last for a specified amount of time or mileage. These contracts state that the factory will pay for specific and covered repairs on components that don’t live up to reasonable—and specifically spelled out—expectations.

What Is Covered In A Car Warranty?

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A car warranty is in place to cover the cost of the repair bill or the replacement cost when you need to take your car to be repaired due to a mechanical failure. It will cover the mechanical defects, but not necessarily damage that occurred outside of these. A car warranty does not cover the repair or replacement of items for what’s commonly referred to as “normal use wear and tear.” A warranty will usually pay for the labor charges incurred to fix warranted items.

Basic Car Warranties

Although most automakers cover the basics—engine, gearbox, suspension, transmission, and steering—there are differences. The typical automaker’s warranty usually has a three-year/36,000-mile limit, whichever occurs first. And as mentioned above, these warranties do not include typical wear and tear items like tires, brakes, and other regular maintenance items. Cosmetic damage is almost always excluded, but occasionally it is included if it is determined to be a manufacturer’s defect rather than wear and tear.

Comprehensive Car Warranty

A comprehensive warranty covers virtually everything else in the car—even the heating, air conditioning, audio system, and electrical components—as long as it’s a manufacturer’s defect that fails and not something that the new car owner broke or damaged because of negligence.

Examples Of Car Warranties
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Some of the best new car, factory comprehensive (sometimes referred to as bumper to bumper) warranties today include:

  • Hyundai: 5 years/60,000 miles
  • Kia: 5 years/60,000 miles
  • Genesis: 5 years/60,000 miles
  • Mitsubishi: 5 years/60,000 miles
  • Volkswagen: 6 years/72,000 miles for 2018 and 2019 models (4 years/50,000 miles for 2020-and-newer models)
  • Jaguar: 5 years/60,000 miles
  • Infiniti: 4 years/60,000 miles
  • Lincoln: 4 years/50,000 miles
  • Tesla: 4 years/50,000 miles
  • Cadillac: 4 years/50,000 miles

Powertrain Warranties

But on that same list of vehicles, differences exist in coverage on items like the powertrain factory warranty:

  • Hyundai: 10 years/100,000 miles
  • Kia: 10 years/100,000 miles
  • Genesis: 10 years/100,000 miles
  • Mitsubishi: 10 years/100,000 miles
  • Volkswagen: 6 years/72,000 miles – (4 years/50,000 miles for 2020-and-newer models)
  • Jaguar: 5 years/60,000 miles
  • Infiniti: 6 years/70,000 miles
  • Lincoln: 6 years/70,000 miles
  • Tesla: 8 years/mileage varies by model
  • Cadillac: 6 years/70,000 miles

 

Corrosion Warranties

When the warranties for corrosion coverage are compared, there are many differences:

  • Hyundai: 7 years/unlimited mileage
  • Kia: 5 years/100,000 miles
  • Genesis: 7 years/unlimited mileage
  • Mitsubishi: 7 years/100,000 miles
  • Volkswagen: 7 years/100,000 miles
  • Jaguar: 6 years/unlimited mileage
  • Infiniti: 7 years/unlimited mileage
  • Lincoln: 5 years/unlimited mileage
  • Tesla: 12 years/unlimited mileage
  • Cadillac: 6 years/unlimited mileage

What Is An Extended Car Warranty?

Extended car warranties are actually “Mechanical Breakdown Insurance” (MBI) or “Vehicle Service Contracts” (VSC). MBIs are regulated in California, while VSCs are used generally throughout the rest of the U.S. Canada and other countries have their own regulations and requirements. A reputable company providing these “extended warranty solutions” should only offer you the program that is legally available in your state. In most cases you can travel outside the state or country you live in and still be covered, no matter where your MBI or VSC was purchased.

These extended car warranty solutions are usually available on vehicles that are no longer covered after the initial warranty periods expire due to mileage or time limits. Some may be purchased as additional protection to pay for mechanical breakdowns as a result of a defect over and above the manufacturer’s warranty. These usually cover the cost of repair and/or replacement of the parts.

Sometimes an MBI or VSC can be more comprehensive than a manufacturer’s warranty in terms of what is covered. However, both are only as good as the company that backs them. It is important to check out the MBI or VSC company’s reputation with the Better Business Bureau and other review sources before choosing the best solution for your needs.

Car Insurance Vs. Extended Car Warranty: What’s The Difference?

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MBIs and VSCs are very different from car insurance, and subsequently they offer protection for different things, as well. Car insurance helps pay for damages to people and property caused by collisions, fire, vandalism, hail, and other weather-related damage. It’s also required to have car insurance to be driving your vehicle legally in the U.S.

An extended car warranty (MBI or VSC) covers the costs of mechanical breakdowns due to defective parts that have nothing to do with being in an accident or another event covered by car insurance. You are not required by law to have MBI or VSC coverage on your car, but some drivers choose to buy these for the peace of mind they provide.

Tip: Most car insurance policies include roadside assistance, so paying your MBI or VSC for this specific feature may be a waste of money. Make sure you ask your MBI or VSC provider if you are being charged extra for roadside assistance, or if you can eliminate roadside assistance to save money on your MBI or VSC.

What Does An Extended Car Warranty Solution Cover?

MBIs and VSCs coverage details vary from company to company, and some companies may offer different levels of coverage for the same car with different pricing and deductible options.

Basic coverage is often similar to the powertrain level coverage found with the original manufacturer’s car warranty. It covers many of the major parts of the engine, transmission, and drivetrain, without covering suspension, steering, braking systems, AC, heating systems, electrical components, instrumentation, power windows, power liftgates, power seats, power mirrors, rearview cameras, emissions, or safety systems.

A comprehensive plan, sometimes referred to as a bumper-to-bumper warranty, often covers just about everything except the wear and tear items such as oil changes, brake pads, and rotors. Sometimes, plans offer a level of coverage between the two, as well.

The bottom line is that it is vital to get detailed terms of conditions from the MBI or VSC provider so you know what is covered with each of their plans.

Who Offers Extended Car Warranty Solutions?

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People generally find and purchase extended coverage against mechanical breakdowns from two sources:

  • From the car dealership where the vehicle was purchased.
  • From a third-party provider.

 

Advantages And Disadvantages Of Buying An MBI Or VSC From A Car Dealership

The advantage of buying from a car dealership is the one-stop shopping convenience this provides, and in many cases the dealer’s program may be a good one. However, you may be asked to make the decision right on the spot, if for no reason other than to roll it into your auto loan. The problem with adding it to your auto loan is that if you later discover you don’t like the program, getting any sort of refund is challenging.

Like most savvy car buyers, you probably researched the car you purchased before you purchased it (perhaps using MotorTrend‘s Ultimate Car Rankings and Car Match services). Taking the time to research available MBI and VSC options should make you feel better about buying the right service. If you don’t purchase at the dealership, you still have time to research and make the right decision after the fact.

Advantages And Disadvantages Of Buying A MBI Or VSC From A Third-Party Provider

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Buying from a third-party provider enables you to research the full gamut of options available for your vehicle, choose the right one for you, and, in some cases, purchase the program on your own terms. It gives you the opportunity to consider different coverage levels, review terms of conditions, and choose to pay for the coverage in a way that suits your needs. In some cases, it’s easier to cancel an MBI or VSC if you don’t need it or you decide to sell your car.

The downside of buying from a third-party provider is that most providers do not publish their pricing online, they use misleading advertising, they may robocall you, and they may use different tactics to pressure you into making a purchase right away over the phone. They may also require you to pay $1,000 or more upfront, making it difficult to cancel if you sell your car or if you do not get the service you thought you were going to get.

Tip: Make sure they offer transparent online pricing, easy monthly payments, immediate coverage, a cancel-anytime policy, and NO Robocalls. If you have a vehicle that’s 10 years old or newer with less than 140,000 miles, you should be able to get an instant online quote from Olive and not have to worry about being robocalled.

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