When it comes to basic auto insurance, it's worth knowing this right up front: Collision and comprehensive will not cover the cost of replacing your car. Similarly, these options won't cover any payments you have left on your loan. If you're buying the bare minimum legally-required insurance — and your auto is totaled — you should expect that what your insurance company pays out isn't quite going to make up the total of your losses. In fact, you may even wind up with a few payments left on a car you didn't even get to keep.
Your insurer will value your car based on a formula that will consider several factors. These exact factors are generally kept a trade secret. But may include the car's age, wear and tear, depreciation and MSRP. It is unlikely that your lender and your insurer will share an opinion on what the auto is worth.
However, you do have some options for total coverage in the event of an accident that leaves you holding the bill for a totaled car.
- Gap Insurance. Gap insurance can be a huge help in the event your car is totaled. Prices vary, but this type of insurance tends to only cost a few extra dollars a month. It will pay off what's left on your loan, minus your deductible. Most gap insurance plans will only cover you for the first few years, but that should be all you need to ensure that your loan is covered.
- Replacement Cost Insurance. This type of coverage generally comes with a higher premium. It can cover not only the current estimated value of your car, but also the cost of replacing it. This coverage is worth considering for high-value vehicles. Even an expensive sports car begins to depreciate the minute you drive it off the lot, and it's good to know you're protected. Some companies even offer better-car replacement plans for those who drive older vehicles.
When it comes to car insurance, buying the legal minimum will help you to stay out of trouble. That said, it might not quite provide you with the peace of mind you're looking for when you have a big loan hanging over your head.
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