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UPDATED: Mar 13, 2020
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When you purchase a brand-new car at a dealership, you may be confronted with questions about insurance. You may also be confronted with several different myths from car salesmen in order to get you to purchase insurance from them. Don’t fall for these myths; know the facts about dealer car insurance before you go shopping.
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Dealer car insurance typically comes in three flavors: GAP insurance, credit life insurance, and a standard auto insurance policy. Before getting into the myths and facts it’s important to know that you have the legal right to buy any of these insurance policies. In no state are you required to purchase insurance from a dealer.
What You Need to Know about GAP Insurance
GAP insurance is a supplemental form of coverage designed to protect you in the event that your car is totaled while you still owe a significant amount of money on your loan. It’s a good product to have when you consider that the average new car loses 15% to 20% of its value as soon as it’s driven off the lot, according to Forbes Magazine and other respected sources.
That means a $20,000 car could be worth only $16,000 before you even get it home. If you signed a loan agreement to finance $18,000, you are taking a $2,000 risk should you get in an accident that totals the vehicle. GAP insurance covers that $2,000 deficit.
One of the myths about GAP coverage dealers try to perpetrate is that the bank requires you to carry it. That’s simply not true. State laws don’t allow banks to make that a requirement as part of a loan agreement. They are allowed to require you to carry comprehensive and collision coverage, but they can’t require GAP insurance.
GAP coverage is completely voluntary.
The other myth about GAP coverage is that if you buy the coverage from the bank through your dealership, you get the best possible deal. This also isn’t true. In all likelihood, you can get this coverage from your current liability provider at a significantly lower rate. Even if it isn’t cheaper, you’re still free to shop around with other carriers that offer better deals.
What You Need to Know about Credit Life Insurance
The Ohio Department of insurance defines credit life insurance as a policy designed to cover the balance of a loan you may take out or any major purchase. It’s available on just about any major purchase people finance.
In terms of buying a new car, a credit life insurance policy would pay off the balance of your auto loan should you pass away before you finished making the payments. Sometimes credit life insurance is offered with an extra provision to make payments for you should you lose your job.
Like GAP insurance, some dealers insist on perpetuating the myth that credit life insurance is a requirement in order to get a loan. Once again, banks are not allowed to place any such requirements on borrowers.
You are free to purchase credit life insurance should you so decide to, but you’re also free to forgo it.
Also, don’t believe the myth that purchasing credit life insurance allows a dealer to give you a better price on the car. Sometimes they will make such claims as a means of getting you to sign deal, only to then turn around and shave just a few dollars off MSRP. The purchase price you pay for a vehicle should never be tied to the insurance options you choose.
Considering the Cost of GAP and Credit Life Insurance
When a car salesman tells you their finance department’s rates on GAP and credit life insurance are as low as you’ll find anywhere, he’s probably not telling you the truth. That’s another myth perpetuated as a means of getting you to purchase insurance from them.
Remember that they need to financially benefit from the transaction in order to make it worth their while to try to sell it to you. On top of that, you might be able to do better on your own with a little bit of financial discipline.
For example, purchasing both GAP and credit life insurance could potentially add about $100 to your monthly payment. However, why not put that money into a savings account instead? You could shop around for cheaper coverage directly from an insurance company and leave the balance of what you don’t spend to earn interest. For the same amount of money, you would be getting equal insurance coverage and a little bit of money in your savings account.
What You Need to Know about Standard Dealer Car Insurance
The third type of insurance your dealer may offer is a standard liability policy with comprehensive and collision included. This would be unusual for most of us, but some states do allow auto dealers to sell car insurance on site. Keep in mind that where this is allowed, auto dealers are only acting as agents for one or more insurance companies. They are not writing and producing the policies themselves.
The myths associated with this type of insurance are numerous. Perhaps the most common is when a salesman tells a prospective customer he is not allowed by law to purchase a car without first having appropriate insurance in force. This myth is nothing more than a sales tactic designed to get you to purchase a policy from them, but it’s not true.
One look at the Vermont Department of Motor Vehicles website tells the truth about the matter: auto insurance is only required to operate a vehicle, not to purchase one. You have the legal right to purchase a car without insurance and then have it towed off the lot. You don’t have to have insurance.
Another popular myth surrounding car dealer insurance is that your dealer has worked out an agreement with several different insurance companies to get the best deal on a policy. However, it’s only if you purchase it through them. Remember that insurance companies base their rates on the amount of risk they’re taking when they insure you. That risk doesn’t change simply because you’re purchasing insurance from a dealer.
Agents earn commissions and commissions are passed on to consumers.
Secondly, when a car dealership does offer standard auto policies they are acting as agents on behalf of the insurance companies they are representing. Even if you do get a lower rate on your insurance policy by purchasing through the dealer, they will find a way to make up for it through surcharges, bank fees, or a higher sales price.
In order to get the best possible car insurance policy at the best price, you need to remain in control of the situation at all times. That can be difficult in a dealership scenario because the pressure brought on by salesmen can be overwhelming at times. It helps to already know what you’re willing to pay before you walk into the dealership.
You can control the conversation by knowing how much a particular car is worth, what the average retail sales price is, and what the average cost of insurance is. You can find all of this information by searching for “total cost of ownership” information online. Sites from organizations like Kelley Blue Book and Edmunds provide total cost of ownership calculators.
If you’re not familiar with the concept, total cost of ownership takes into account all of the money you’ll spend to own a particular vehicle. Consumer Reports provides a good visual representation using pie chart. They show expenses that include the retail price of the car, how much you will pay for insurance, the cost of gas, maintenance and repair bills, etc.
By knowing the total cost of ownership, you’ll have a good idea of what you can expect to pay for insurance. That will give you the upper hand when dealing with car insurance salesman. It may not get you a better price on dealer car insurance, but at least you’ll know enough not to purchase insurance from them if their quoted price is higher than the average price.
Know Your Rights
The bottom line in this whole discussion is that you have the right to determine from whom you will buy your car insurance. Whether you’re talking about GAP coverage, credit life insurance, or your standard auto policy, you are under no obligation to purchase it through your local dealership.
Furthermore, in most cases you will get a better price by purchasing all of your insurance coverage through an independent agent or directly from your insurance company. Don’t fall for the myths surrounding dealer car insurance or the sales pitches thrown at you by those only interested in selling you a car. You can usually do better than what they are offering.
One way to know insurance prices before you go shopping is to obtain a handful of car insurance quotes by entering your ZIP code into our FREE search tool on this page!