What You Don’t Know about Gap Insurance

When one searches for “gap insurance”, the results are mostly about its definition, its importance, and whether one should buy it from the dealership. But it is rare to get information on how and where to buy it if one decides to get it.

People should consider gap insurance if they have an auto loan. When the car gets totaled in an accident, they still have to pay off the loan. But regular auto insurance only pays the maximum amount of the car’s current value. Because of depreciation of car value, that means the amount the insurance company will pay is often less than what one actually owes to the loan lender. The gap insurance then kicks in to pay off the difference.

Photo from My Stock Photos

          If you know what gap insurance is and decide to get one, then where and how to buy? It is widely known that it is not a good idea to buy at the dealership. So we exclude that option.

The best way to buy gap insurance is to shop together with the regular auto insurance. Here is the trick: almost all of them do not sell gap insurance independently, you have to either have your auto insurance with the carrier and add gap insurance to your policy, or have your auto loan with the carrier.

For example:

State Farm: in order to buy gap insurance from them, one needs to take its auto loan. If one has an auto loan from another lender, he/she will not be able to buy gap insurance from State Farm even if he/she already has auto insurance with them.

Progressive/Liberty Mutual: in order to buy gap insurance from them, one does not have to take auto loan from them. But one needs to switch auto insurance to them, and then add gap insurance to the policy.

Different insurance companies have varied policies regarding gap insurance. If you are going to take an auto loan and really need gap insurance, you need to be careful about from where to buy your auto insurance policy. It will be more convenient if you have the option to add gap insurance to your existing auto insurance coverage.

If you are refinancing an auto loan, you can also consider companies like State Farm, who sells auto and gap insurance all together. Unless their rate is competitive, I would not switch an auto loan just in order to get its gap insurance. 

I want to disclose that I am not familiar with gap insurance when leasing a car. I guess the theory and practice are similar. Financial wise, leasing cars is a bad idea.  

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Graduation and Health Insurance

     

       Before you graduate from college or graduate school, you probably never need to care about your health insurance. Some may stay within their parents’ plans until they are 26. According to the Affordable Care Act, after reaching age 26, one needs to have their own health insurance plan. For those who are not covered by their parents’ plans, they were mostly required to enroll in the plan offered by their school. In such cases, there is not much you need to do. If you really care, the only thing you can do is reading the health insurance brochure, finding out what is the copay for different types of visit. Of course some people do have the option to take the plan offered by their school or opt out.

Each academic year the insurance premium is included in the tuition and fees. You just pay it and forget about it. Most student health insurance plan provided by the university are pretty good. The copay is low. Besides, most of the time, whenever you have a medical issue, you go to your university physicians and they can resolve most issues right there, and in such cases the copay is lower or even zero. When I was in graduate school, my university health center designated a small team of physicians to each student. So each student would keep seeing the same physicians throughout the years. Rarely when one needed special care, the university physician will refer the student to see a physician outside.

The situation would be very different once you graduate and start a job. You need to choose your health plan from various options. It is important to figure out how healthy you are, how much health care you may need in the coming year. This would require some calculation done at home. In general, higher monthly premium means lower copay and less total cost, and vice versa. If you are in good health, and will not need to see doctors that often, you may want to get a lower monthly premium so to save money.

But I do not recommend to be too stingy on health care. We all know how expensive health care is in this country. An ER visit can easily cost around $10,000. Without a proper coverage, one can in deep financial trouble. That is why one should pay attention to another factor in choosing health insurance plans, the annual limit. That is, in the worst case, you much you are required to pay out-of-pocket before insurance kicks in. For example, plan A’s annual limit may be $5000 for one person, plan B’s annual limit is $7000 for one person. Let’s say, one developed a health problem that cost $8000 to fix. With plan A, one only needs to pay $5000 out-of-pocket, the rest $3000 will be paid by insurance. With plan B, one needs to pay $7000, insurance will pay $1000.

Many of us will be overwhelmed by the benefit package we are offered by our new employers and the work need to be done in order to make the right choices. Some may never heard of some of the benefit items. For example, my European colleagues have said that they never knew they need retirement plan. They felt strange and angry that they have to put part of their monthly salaries to a retirement plan. The point is, these are new things one needs to figure out. It does not matter if you know it or not, it is your task to make decisions for you. If you screw up, it is your money.

If you read this article or similar ones, I am sure you will be better prepared once you graduate and start your new life.   

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