Learning More About Gap Car Insurance
Many drivers donâ€™t understand what the term gap insurance actually means. This type of insurance pays for any gap between the present fair market value of a vehicle and the amount you still owe on an auto loan.
Itâ€™s important to note that collision and comprehensive auto insurance policies will only pay for the fair market value of your vehicle. Surprisingly, this can be 80 percent lower than the actual price you paid for it. If your car is ever stolen or demolished in an accident, you may end up owing your financing company as much as 20 percent more than the amount covered by your insurance provider for the vehicle.
If your vehicle is stolen and never recovered, your insurance company will consider the loss the same as an at-fault accident. This means that your comprehensive insurance coverage may pay you for the vehicleâ€™s value, but not the entire amount you will owe to your financing company. The end result is paying a lot of your hard-earned money for a vehicle that canâ€™t even be used.
Example of Gap Insurance
Letâ€™s assume you have obtained a loan for $30,000 to purchase a new vehicle. Shortly after you finish signing the relevant loan documents, you are involved in a serious accident that totals your new car. At that point, your insurance company will probably only cover the quoted Blue Book amount for your vehicle. This means that you may receive a check for part of the amount owing, but not all of it. Fortunately, any excess money you still owe on your car loan will be covered by your gap auto insurance.
Who Requires Gap Insurance
If you decide to lease your vehicle, you will often need to buy gap car insurance. However, if you purchase a new car, you may also want to purchase this type of insurance coverage. Generally, the more money your new car costs to buy, the greater need for this type of additional insurance coverage.
How to Obtain Gap Auto Insurance
Given that the value of any new car drops greatly the minute you drive it from the car dealership, you should purchase gap auto insurance coverage. Although this type of insurance policy is not mandatory when you buy a new vehicle, you will be very glad you have it if you are ever involved in a motor vehicle accident. Many leading insurance companies such as Allstate, Progressive and AIG offer gap auto insurance. Certain states even require insurance companies who sell auto insurance policies to carry this type of optional coverage as well. If your insurance provider does not offer gap insurance, talk to another company and buy it as an independent insurance policy.
When You Should Buy Gap Auto Insurance
If you meet any of the following criteria, you should seriously consider purchasing optional gap insurance:
You have leased a new vehicle
You have transferred debt from a previous vehicle to your present auto loan
You have bought a new vehicle with a lower down payment than 20 percent
You are financing a vehicle for a period of more than 4 years
You live in an area with a high rate of auto theft
Gap insurance is a type of coverage that is normally only required for a temporary period. The cost of this type of insurance coverage is relatively low, so you should consider purchasing it if you have recently purchased a vehicle and made a down payment of less than 20 percent of the total cost. For the initial 2-3 years, you will usually owe more money than the actual value of the vehicle if you paid a small amount for the down payment. You donâ€™t want to risk being ruined financially if your vehicle is stolen during that time period or you are involved in a serious car accident. Gap auto insurance can provide you with peace of mind.