Most auto owners are familiar with auto insurance. In many cases, this is because this type of insurance coverage is a requirement in all but two U.S. states. However, because a vehicle can also be a costly purchase, this insurance is also necessary for protecting that investment from unexpected damage, vandalism or theft.
Typically, if a vehicle has been involved in an accident and is in need of repairs, the insured vehicle owner will pay the amount of the policy's deductible, and the insurance policy will pay out the remainder of the costs so that the vehicle can be repaired.
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In some cases, however, when a vehicle is so badly damaged that it is considered to be a total loss, the compensation that is received from the vehicle owner's auto insurance company may not be enough to fully cover the amount that the individual owes on the vehicle's loan or lease agreement.
This situation can typically arise when the balance that is owed on a vehicle's loan is more than the book value of that vehicle. When this is the case, it can become quite costly for the individual. The good news is that there is a financial solution. This comes in the form of "gap" insurance coverage.
Gap (or GAP) insurance, or guaranteed auto protection, is typically offered through new car dealerships when a vehicle is being financed. And, although most new car purchasers may not initially go with this coverage, many wish that they had.
How Does Gap Insurance Work?
Gap insurance is a type of auto insurance coverage that a vehicle owner can purchase to help protect them against a loss that may arise if the amount of money received from his or her regular insurance coverage is not sufficient in paying off the balance of the vehicle's loan or lease.
As an example, the "blue book" value of David's car is $10,000, but he still owes a total of $15,000 worth of car payments on it over time. If David is in an auto accident and his vehicle is written off as a total loss—or if his vehicle is stolen and is written off as a theft—then his auto insurance policy will only reimburse him for the $10,000 blue book value of the vehicle.
Because David still owes $15,000 worth of car payments, he will be $5,000 short. However, he will no longer have a car to show for those payments. Therefore, if David had a gap insurance policy, the coverage would cover the $5,000 "gap"—or the difference between the $10,000 blue book value of the vehicle and the $15,000 amount that David owes the finance company.
How Much Does Gap Insurance Coverage Cost?
The premium price on a gap insurance policy will be dependent on a number of different criteria. For example, the insurer will take into account the make and model of the vehicle that is being insured, as well as the purchase price.
This type of coverage may be purchased and quoted from several different places, including car dealerships where a vehicle purchase or lease was initiated, insurance companies that specialize in gap insurance coverage and from online gap insurance sellers.
The Many Advantages of Owning a Gap Insurance Policy
While the majority of motorists scoff at the idea of purchasing additional insurance coverage, gap insurance can actually pay for itself many times over. With this coverage, you can be protected from owing money on an auto loan or lease on a vehicle that is totaled and that is no longer of any use to you.
In numerous instances, the owner of a vehicle will actually owe more than the estimated value of the auto. This is because the loan will include ancillary amounts such as interest, taxes, and fees.
In addition, the actual value of a vehicle will also depreciate very quickly - especially when purchased brand new. Therefore, if a driver totals his or her vehicle before the car's loan has been fully paid off, then it is highly likely that there will be costs over and above what the regular auto insurance policy does not cover. With that in mind, a gap insurance policy can save hundreds - if not thousands - of dollars for a vehicle owner.
Considerations Before Buying Gap Insurance Coverage
Prior to purchasing gap insurance coverage, there are several items to keep in mind. First, just as with other types of insurance, a gap insurance policy will only pay off the auto loan balance if the terms of the agreement have been met. Therefore, it is essential to read all of the fine print in order to ensure understanding of what the plan will - and will not - cover.
Often, gap insurance policies require that the vehicle owner carries both collision and comprehensive auto insurance coverage on the vehicle. Gap insurance is not a replacement for such coverage, but rather a complement to it.