car insurance Archives — Auto Trends Magazine

Here’s an unpleasant thought: you buy a new car and within months it’s stolen or totaled following an accident. You believe that your insurance coverage is excellent, but are soon rudely awakened when your finance company sends you a bill for thousands of dollars. Had you chosen gap insurance, your finance company wouldn’t be demanding payment. That is if you knew about such coverage in the first place.

car crash gap insurance — Is your auto insurance sufficient for protecting you against total loss?

What is Gap Coverage?

Gap insurance, also known as gap coverage, pays the difference between what you owe on your vehicle and what your car is worth. Gap coverage is especially important if you do not put enough money down on your new car and its value has slipped below what you owe on it.

For instance, you buy a new car and pay $27,500 for it, putting $2,500 down. You take out a loan for $25,000 and five payments later your outstanding balance falls to $23,500.

Unfortunately, you get into an accident that destroys your car, which soon reveals how vulnerable you really are. You file a claim with your insurer and the insurance company sends your finance company a check for $19,500, representing the value of the car minus your $500 deductible. The difference here is $4,000, an amount that your finance company says that you still owe on the loan.

That gap represents the difference between the loan balance and your insurance payment, monies that you must repay.

Going Upside Down

Many car shoppers are “upside down” or “underwater” with their auto loans, a term that also describes some homeowners.

Typically, borrowers are upside down for two reasons:

1), they do not put enough money down, and

2), the car loses a significant amount of its value within the first few months of ownership.

Indeed, it is not uncommon for a new car to depreciate rapidly with Edmunds.com noting that a new vehicle loses on average 11 percent of its value the moment it drives off the dealer’s lot. Several months later the car’s value may fall by 25 to 30 percent, making it entirely possible that you owe more to your finance company than what your insurer says it is worth.

Gap Protection Coverage

You may not need gap protection if you put 20 percent or more down and your loan term is short, such as for 36 months. Some consumers make the mistake of rolling their related fees and taxes into their loan and perhaps adding extended warranty coverage as well.

One way to make sure that you are not buying a car that will immediately put you underwater is by using an auto loan calculator such as the one that’s available online from Bankrate.com. Then, compare that number with what Kelly Blue Book lists as your vehicle’s depreciation rate.

As long as you owe less for your vehicle than what it is worth, then you are okay.

Buying Gap Insurance

Before you run out to buy gap coverage, you should review your loan purchase agreement as you may already have it. Such coverage is more common if you lease a vehicle than if you were to finance one. In any case, your finance company may have added that coverage with your agreement.

Indeed, some lenders require gap coverage because they know you may find it difficult to settle the difference later on.

Your current insurer may offer gap coverage, a small cost that’s added to your auto insurance bill. Contact your insurer to get a quote for the gap or actual cash value insurance.

Keep in mind that you will still have to pay a deductible and may receive less money if your car has high miles or is in poor condition. You can cancel gap coverage once you determine you are no longer upside down.

Avoid a Financial Catastrophe

Gap coverage may save you from financial calamity, enabling you to get back on your feet quickly. Without such coverage, you may find yourself unable to afford a replacement vehicle, worsening an already serious problem.

See Also — 7 Ways to Trim Car Insurance

Photo credit: La Cara Salma via Wikipedia. This file is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported, 2.5 Generic, 2.0 Generic and 1.0 Generic license.

Americans resoundingly reject non-driving characteristics in determining auto insurance rates.

If you’re a low-income American, chances are you’re paying plenty more for auto insurance than other citizens even if you have a similar driving record and home address. Those are the findings of the Consumer Federation of America (CFA) based on a study the non-profit organization released on Monday.

Low Income Status = Higher Insurance Premiums

The CFA evaluated minimum limits liability premiums shared by men and women in 15 cities by five of the nation’s largest auto insurers. Specifically, the CFA found that premiums surged by an average of 59 percent, or $681 annually when characteristics of the drivers were changed to denote a lower economic status. Auto insurance is required in all states with New Hampshire the lone exception. Insurance is regulated at the state level.

“Insurance companies should judge you on how you drive, not who you are,” said J. Robert Hunter, CFA’s Director of Insurance and former Texas Insurance Commissioner. “Insurance companies are penalizing good drivers by hundreds and sometimes thousands of dollars each year based on economic and social status, and the end result is that the poor pay more, much more.”

Five Non-Driving Factors

Auto insurers use five factors when developing quotes for consumers. They are: level of education, occupation, homeownership status, ownership of a car during the prior six months, and marital status.

The CFA found that drivers with the same driving record and living at the same address may pay dramatically different rates, especially if multiple factors are considered. For this study, 15 cities were examined with the five largest auto insurance companies surveyed — Allstate, Farmers, GEICO, Progressive, and State Farm studied.

The study revealed the average premium for all drivers with high economic status indicators was $1,144. On the other hand, the low economic status driver is charged $1,825. That’s 59 percent or $681 more than people with a higher net wealth.

Of the five insurers survey, GEICO (92 percent) and Progressive (80 percent) charge the largest premium increases to lower income drivers residing at the same address. The largest per dollar increases come from Allstate ($915) and Farmers ($900). The lowest increases are assessed by State Farm, which charges $217 more per year or is 13 percent higher.

Your Home Address

Depending on where you live, your auto premium as a low-income driver can come in much higher than average. Drivers in Queens, Jersey City, Boston, Atlanta, Minneapolis, Houston, and Jacksonville face the most significant increases, topping $700 per year versus high-income drivers.

On the other hand, if you live in Los Angeles your rate may average only $80 per year higher, an increase of 9 percent. That’s due chiefly to a 1988 voter proposition passed by Californians whereby non-driving-related factors (except for marital status) could not be considered by the insurance companies.

Survey Says

The CFA authorized ORC International to conduct a poll of 1,000 Americans from June 9-12, 2016, to gauge their opinions about auto insurance. The organization discovered that a large majority of Americans believe that auto insurance premiums should be related to policyholders’ driving safety record and accident history. They also indicated that the insurance companies should not use personal economic factors such as their education or occupation in establishing rates.

In particular, 84 percent of Americans believe that auto insurers are acting very or somewhat fair in using moving violations as a factor in developing insurance quotes. Some 83 percent believe that if drivers are in an accident they caused, then their rates should be reflected accordingly.

When non-driving factors are considered, the respondents shifted their answers dramatically in support of the drivers.

Indeed, only 38 percent believe that credit scores should play a factor in determining insurance rates. Home ownership (35 percent), job occupation (35 percent), and marital status (32 percent) were other factors considered. Only 30 percent agreed that no previous insurance because of no car should be a factor. Some 29 percent thought education level should be used as a determining factor.

“The American people don’t like the idea of insurance companies using personal and economic factors to set premiums, even though most people don’t realize how much of an impact these non-driving characteristics have on the price they pay for coverage,” said the study’s co-author Doug Heller.

In two instances, the insurers bucked the trend, giving lower-income drivers an edge. For instance, Allstate lowered rates by 19 percent for the lower economic status female driver in Chicago and by 4 percent for both male and female drivers in Oklahoma City.

Free Quotes or Not

As is common practice, the insurance companies provide online quotes for consumers, but not always. The CFA has found that if income status is changed from high to low, then online quotes are typically not supplied to the latter. Even with such key factors as address and driver record considered, the insurance companies often refer people to local brokers or to partner companies.

The CFA continues to advocate a state-by-state change to auto insurance underwriting to adopt more equitable methods for determining insurance rates. Because auto insurance is mandated by law in all but one state, then regulators and legislators should protect consumers from unfair practices, including those outlined in its report.

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Gap Insurance May Save You Thousands of Dollars