For many automotive drivers, Gap Insurance is an important coverage to have along with normal car insurance policies. Aptly named, gap insurance covers the gap between the amount an owner owes for a car and the total value of the car if it was ever totaled in a destructive accident.
Purchasing a New Car
Drivers purchasing new cars are often urged to purchase gap insurance for this reason, as their car loan at the time would far exceed the car’s value, which drops as soon as it leaves the lot. Both insurance companies and lenders offer gap insurance in order to protect their drivers from potentially unforeseen financial losses.
For example, a person purchases a brand new car for $28,000. However; only weeks later the driver swerves off a road to avoid an animal and crashes into a tree. The unfortunate circumstance is that the car is now totaled. Since the driver has yet to make any payments on his or her new car, the amount owed is still going to be the sales price, minus any down payment.
Then, if an insurance company assesses the damage and agrees to settle the claim with $24,500 – a figure the insurance company would term the car’s actual cash value. Even after a $500 collision deductible, though, the driver must now still pay the remaining $3,500 out of pocket for a car they can’t drive. Gap insurance would cover this balance.
So who needs gap insurance?
While purchasing gap insurance is often a smart financial move no matter the owner, those who cannot afford to pay the aforementioned gap out of pocket may wish to purchase the coverage. Also, those who are unable to pay a large down payment are urged to purchase the insurance as well, as exemplified in the aforementioned scenario.
Gap Insurance for leased vehicles
Gap insurance also applies to leased vehicles; however, many dealerships often include gap insurance in their contracts. Thus, it is important for lessees to check their contract for this coverage before purchasing it from their auto insurance company.
It is also important to note that not all major insurance companies carry gap insurance, so determining which do is a significant step in choosing an insurer.
Finally, the last important issue to note with gap insurance is that it is only relevant if a person is financing a car. If a buyer makes a cash transaction, he or she will not have any remaining balance, and thus, no gap to cover.