Car ownership is an investment that is significant, but it also comes with certain dangers. There is the chance of losing everything from the result of an incident, theft or other unforeseeable incidents. That’s why gap insurance comes into the picture, providing an insurance policy for car owners. What exactly is gap insurance as well as why it is so important? Let’s take a look at this crucial financial tool and see how it can help you avoid unexpected costs.
Understanding Gap Insurance
Gap insurance, also known as Guaranteed asset protection insurance is a special policy created to help cover that “gap” between the amount you owe on a car lease or loan and your market value of the car. The value of the car is determined by various factors such as depreciation which can significantly impact the value of a car when it is driven off the dealer lot. The problem is that traditional auto insurance will only cover the current value of the vehicle in the case of a total loss that leaves drivers accountable for the remainder of their lease or loan.
In the example above for instance, if your car has been damaged to the point that your insurer covers the cost of $20,000 and you have to repay $25,000 of the loan, gap insurance could be able to cover the difference of $5,500. Without this protection you’d have to pay out from your pocket for a car that you no longer own.
Who Should Consider Gap Insurance?
It’s not necessary for every driver to have the insurance for gap, however it can be useful in certain situations. If you’ve bought a brand new vehicle with a modest down payment, the balance of your loan could exceed the depreciated price for a lengthy time. If you lease an automobile the gap insurance is usually an obligation set by the leasing firm to ensure their financial interests.
This insurance coverage is great for drivers that have high depreciation rates. Certain models, or even luxury cars are prone to losing value rapidly which makes an “gap” between what’s owed and the market value of the car significantly larger. In these instances gaps insurance assures you don’t have to deal with unexpected financial hardship in the event of a catastrophe.
How Does Gap Insurance Work?
If a tragic event causes an entire loss to your car and you need to file a claim, the procedure for gap insurance is simple. After your primary insurance company determines the payout in accordance with the car’s current market value then the gap insurance policy will step into the gap to pay for the difference between that amount and the amount on your lease or loan.
It’s important to know that gap insurance will not cover the deductible that you have on the auto insurance plan neither does it cover extra charges such as late fees or extended warranties that are tied to the loan. The main purpose for gap insurance is fill the financial gap, and ensure you’re not left with unpaid due to a car that you don’t own anymore.
Where Can You Get Gap Insurance?
Gap insurance is offered through many sources, allowing customers the option of choosing the one that best suits their requirements. A lot of dealerships provide gaps insurance when you buy or lease a car typically, and then roll the cost into monthly installments. But, this is more expensive when than purchasing gap insurance from your insurance provider for autos.
Individual gap insurance policies are also available through certain insurance firms and financial institutions. They tend to be cheaper and more flexible that allows drivers to pick policies that are suited to their particular situation. It’s worthwhile to compare prices and terms with different providers to ensure that you’re getting the best value.
Factors to Consider Before Buying Gap Insurance
Before you commit to gap insurance, you need to analyze your personal circumstances and decide if this insurance is needed. Consider the depreciation rates of your car and the conditions of your loan or lease, and also the amount of equity in the vehicle. If you have made a significant down payment or completed the repayment of a substantial portion of your loan, then gap insurance may make sense to avoid the extra expense.
It’s also crucial to be aware of the specifics that apply to the insurance policy. Certain providers place restrictions regarding eligibility based upon the mileage or age of the vehicle. Also, the gap insurance usually is only valid for a specified period of time–usually the initial few years of ownership. Therefore, make sure you review the period of coverage prior to purchasing.
Is Gap Insurance Worth the Cost?
Gap insurance provides peace of mind by shielding your financial assets from sudden financial burdens in the case of a total loss. Although it’s not required for everyone however, those who have new cars or high balances on loans or leases could significantly benefit from this insurance. With a minimal price, gap insurance will save you thousands of dollars in expense out of pocket and help ensure that you don’t end up paying for a vehicle you no longer utilize.
The final decision is down to your personal financial situation and risk tolerance. If you’re not sure about your risk tolerance, it’s recommended to talk with your insurance representative or financial advisor to consider the benefits and disadvantages of including gap insurance in your insurance policy.
Closing Thoughts on Gap Insurance
Gap insurance is an effective option for drivers looking to protect themselves from risky aspects of car ownership. In closing the gap between what your vehicle is worth and what you owe, this kind of insurance can protect you from financial burdens that aren’t needed. When you’re looking to purchase a new vehicle as well as leasing one knowing the process of gap insurance and whether it’s suitable for you is essential. Make an educated choice so that regardless of what happens, you’re safe when you travel.
