What purpose does gap insurance serve?
Scenario
I am going to buy a new car. However, I don’t intend make an outright purchase and will pick the financing option offered by the dealer. Now, along with the regular auto insurance coverage, I am also being offered gap insurance. How will that be of any help?
Solution
Gap insurance policy will actually be beneficial for you, since you’ll be taking out a loan to buy your car. Read along to know more about gap coverage.
Guaranteed Auto Protection is more commonly known as GAP policy. Such a policy is especially useful if the automobile owner has leased the vehicle or taken out a loan for it. It lends financial assistance to the automobile owner, when his or her vehicle gets totaled in an accident, even before the loan amount is paid off. This is all the more significant since the value of a car depreciates with time. Thus, if the value of your vehicle is less than what the auto insurer pays you when your car gets totaled, you may end up paying the surplus amount of the loan out of your own pocket, even though you wouldn’t have the car to use.
Accidents are unpredictable. Even if you’re a safe driver, you may get involved in one anytime. What if your vehicle gets totaled, say, after 5 years? Since the value of a car depreciates by around 30% in the first year only, your car would cost much less than what it had cost in the first place. As you say, the regular auto insurer will only pay you the Actual Cash Value (ACV) for the car. If you have outstanding loan balance, even after paying the ACV, you’ll have to continue paying for the loan. If you have GAP insurance, the surplus amount will be covered by your policy only. You won’t need to worry anymore about the loan, since it will be paid off completely. Thus, you can see that a gap insurance policy will in fact be helpful for you in the long run.
Now, if you’re worried about the cost, please be informed that gap insurance doesn’t cost much. Most of the financing companies will ask you to carry a collision and comprehensive coverage, till your loan gets paid off. Gap insurance is an additional automobile insurance coverage, which costs around 5%– 6% of the amount you pay for your collision and comprehensive coverage. Nevertheless, the value of the car, the loan amount and the loan repayment period also influences the cost of your gap coverage.
However, a gap insurance coverage is not mandatory. So, if you don’t want to pay extra for the gap coverage, you can decline purchasing it in the first place.
Besides, some insurers impose certain limitations before issuing you the gap coverage. Make sure you understand what is being offered to you and the extent of protection that your gap insurance will provide at the time of a total loss. All said and done, it’s really advisable to go for gap coverage along with your regular automobile insurance.
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