When it comes to insurance for cars the majority of people concentrate on the essentials: liability as well as collision and comprehensive coverage. But there’s an obscure option that could be a major difference should you ever be involved in a serious accident such as gap insurance. This particular type of insurance is intended to protect motorists from financial loss that conventional insurance policies on cars might not cover fully. What is the purpose of gap insurance and why do you need it? Let’s look into the specifics.
What Is Gap Insurance?
Gap insurance, also known as “Guaranteed Asset Protection,” is an add-on option to your insurance policy for autos. It is a way to cover the difference – or “gap”–between your owing amount on your vehicle lease or loan and your car’s market value today that is determined by the insurer. This insurance coverage kicks in when your vehicle is declared to be a total loss as a result of the result of an incident, theft or any other event covered by the policy.
In simple terms gap insurance makes sure that you don’t have to pay the costs for a car you no longer own. Insurance for autos will typically only pay the cost (ACV) that you paid for the vehicle in the moment of incident, and that’s the amount you pay for depreciation. However, vehicles have a tendency to decline in value very quickly. it’s common to have the amount that you owe on a lease or loan to be higher than the ACV. This is when gap insurance can make a difference.
Who Needs Gap Insurance?
While not every driver needs gaps insurance, the policy is advantageous in certain circumstances. If you’ve recently purchased or leased a brand-new car then you’re a good candidate. Cars that are new depreciate quickly, often up to 20% within the first year. If you make an unimportant down payment or opt for a longer-term loan, you could owe substantially more than your vehicle’s actual value within a few months of getting off the lot.
Gap insurance can be beneficial when you’ve transferred negative equity from an earlier car loan to the current one. Negative equity happens the moment you’re owed more to your previous vehicle than the value of it and adding that sum to the loan you’re taking out will increase the risk to your financial situation. If you don’t have gap insurance it’s possible to end up spending thousands to purchase an automobile that is no longer capable of driving.
How Does Gap Insurance Work?
To better understand the mechanism behind gap insurance, take this scenario as an example A brand-new car for $30,000 and then six months later the car is involved in a major accident and declared to be a total loss. At this point the vehicle has diminished in value and is currently valued at $24,000. But, you still have a loan balance of $28,000.
If you don’t have gap insurance standard automobile insurance would protect the vehicle’s ACV of $24,000, but you’d be responsible for the remainder of $4,000 in the your pocket. By having gap insurance the $4,000 is protected, freeing you from a huge cost.
Gap insurance doesn’t provide coverage for other costs such as an deductible or late payment or late payments on your car loan. It’s designed to help you deal with the particular gap between your lease or loan amount and the market value.
Where to Get Gap Insurance
It is possible to purchase gap insurance from your auto dealer or lender, as well as your an auto insurance company. While dealers often advertise gaps insurance as part of the process of financing but it’s more economical to include it into your existing auto insurance policy. The cost of gap insurance varies but usually vary between $20 and $40 per year when it is included in an existing policy.
It’s important to remember that gap insurance typically only available for brand new or similar automobiles. Furthermore, some lenders or leasing companies will require that you have gap insurance as a requirement of your lease or loan contract. Check the conditions carefully to determine if you require gap insurance and how to get the most affordable rates.
When to Drop Gap Insurance
Although gap insurance can provide crucial financial security It’s not something you’ll have to keep for ever. When the balance of the car loan or lease is lower or equal to than the market value at the time it is possible to drop the insurance. It usually happens at the midpoint of the term of the loan, based on the amount of the loan as well as the interest rate and the rate at which your car depreciates.
It is recommended to regularly review the balance of your loan and examine it in relation to your car’s ACV in order to determine if gap insurance still needed. If you’re not sure whether you need insurance, your insurance provider or lender may be able to determine whether the insurance is still useful.
Final Thoughts on Gap Insurance
Gap insurance may seem like the last thought you think of when considering auto insurance, however it can be a lifesaver when needed in certain scenarios. For drivers who recently purchased or leased a brand-new vehicle or have negative equity due to a previous mortgage, gap insurance can provide assurance and security for financial transactions.
Before you decide on gap insurance, take into consideration your particular circumstances, such as the rate at which your car depreciates as well as loan terms, as well as down amount. Although it’s an additional cost, the benefits when faced with a complete loss could far exceed the price. The essence of gap insurance is an insurance policy that protects you from unexpected financial troubles, and permitting you to continue your journey without stressing about unmanageable debt.
