The most basic understanding of car insurance that an average Joe has is that you pay an insurance company an early or monthly premium and in the case of an accident, the company will cover the charges for repairs. While this is true, there are so many conditions in fine print that make getting insurance a tricky affair. It is due to these conditions that the companies have Gap insurance. What is Gap insurance and do you really need it for your car? This article will elaborate on everything you need to know about Gap insurance.
What is Gap Insurance?
As the name suggests, this insurance is meant to fill some “gap” in the car insurance available in the market. Let’s try to understand Gap insurance in the best and easiest way possible. A Gap insurance fills the monetary gap that might arise in some situations when the insurance coverage is not enough.
There are two major types of insurance policies that protect your car from damages; Collision insurance and comprehensive insurance. Collision insurance will cover the damages caused during an accident that you are responsible for. For example, if you hit someone’s car or vice versa, or perhaps you hit a tree or anything, collision insurance will cover the repair charges minus the deductible.
Comprehensive insurance will cover the damage to your car which does not happen by your fault. So a tree falling on your car, damage from a hailstorm, riot, theft, etc. All these are covered by the comprehensive insurance policy.
So if you get these two policies (which most people get), you are all set, right? At first thought, yes, you get great coverage from almost all the possible ways your car can get damaged. But there is one huge “gap” that most people miss.
When Gap Insurance is Used
Gap insurance is used when your car is completely damaged, totaled, or gets stolen. And it is used when either you have financed the car or taken it on lease. Let’s say that you got a cat that costs $20,000, but opted to finance it for five or ten years. So the total cost of the car (including the interest) would be more than $20,000. You’ll have to pay the bank around $25,000 based on the interest rates.
Now if during this period when you have not completely paid the total amount, your car gets totaled or stolen, or anything that makes it unusable junk. The collision and comprehensive insurance will cover the price of the car, which is $20,000 here. But you still owe the bank $5,000 more. Who’s gonna pay for this gap? You guessed it, Gap insurance.
This is the most common reason people opt for Gap insurance. And it makes total sense to get one because you don’t wanna be that person paying thousands of dollars to your bank for a car that isn’t a car anymore. Not just that, but some Gap insurance covers negative equity. This means that in case of a trade-in if you owe more than the current worth of the car, the negative equity will be added to your new loan amount.
Getting Gap insurance sounds great, but there are some instances where getting it isn’t a great idea. Let’s see when to get Gap insurance and when to avoid it.
When to get it
It goes without saying that you need to have Gap insurance if you are financing or leasing the car when the total amount you owe the bank is more than the actual cash value of the car. Most of the finance period is usually around 5 years, which adds the interest rate to make the total price of the car more than its actual value. So in case your car gets totaled or stolen, Gap insurance would be a life-saver.
Another situation when you should get Gap insurance is when you are financing a car and paid a very small amount as the down payment. Also if you have negative equity from your previous car loan, then getting Gap insurance that covers it would be beneficial and worth it. Gap insurance is not that expensive and you can find some of the cheapest auto insurers that offer it at even lower prices.
An often overlooked factor is vehicle depreciation. The moment you buy a car, its value starts depreciating. According to a survey, on average, a car loses its value by over 40% every five years. Remember that insurance companies will cover the actual cash value of the car for reimbursements. Actual Cash Value (ACV) is the price of the car at the current market value. So if you get a car that loses its value faster than other cars, then having Gap insurance would be very helpful.
When to avoid it
Now that you know when you need Gap insurance, it would be easy to figure out when you should avoid it. The most obvious scenario is if you have not financed your car or your loan repayment is over. So keep the gap insurance till you pay the loan and then cancel it.
Things to Note
The most important thing to know is your state’s definition of “totaled”. Different states have different definitions of complete car damage, so make sure you are familiar with it. Another thing to note is that gap insurance is separate insurance and it does not affect your collision or comprehensive insurance, as well as the deductibles. And that’s it, now you know what Gap insurance is and if you need it or not.
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