Understanding Gap Insurance


For anyone shopping for a car insurance policy, they're probably going to be faced with the offer to add on gap auto insurance. This type of insurance isn't required but it may be a good idea for some car owners.

Accident Coverage

The point of gap insurance is if your car is totaled or stolen. In these cases, car insurance is going to provide the owner with a cash settlement that's based on the car's actual cash value. This is usually not what the owner paid for the car and since cars depreciate in value rapidly, the settlement may not cover what the owner owes on the car loan. This can result in not only not having a car but also a large payment. A gap coverage is designed to literally cover the "gap" in these two values.

Keep in mind that this optional coverage is designed to be used for newer cars and will be added onto a collision insurance policy. An older car or one that's already been paid off wouldn't need this coverage and it also wouldn't provide much benefit to owners so this is only a good option for the first few years of owning a car.

If taking out a loan for a car, the lender may actually require gap insurance. Check with the loan company before purchasing a vehicle to determine if this is the case.

Benefitting from Gap Insurance

There are a few scenarios where it's going to be worth the extra cost of gap insurance:

* purcahsing or leasing a new or slightly used vehicle* purchasing a very expensive vehicle* Buying a new or slightly used vehicle without a large downpayment* Not having cash savings that would allow you to cover the difference between the loan and the value of the car if stolen or damaged

As with most types of insurance, the decision to choose this option is going to come down to risk. Adding up gap coverage usually costs only a few dollars a month. However, it does allow car owners to avoid the possibility of having a large financial burden if something happens to their car. Anyone who is financially unstable and needs a car for school or work may want to add this coverage.

Value Losses

The reason why it only makes sense to purchase gap insurance coverage in the first few years of owning a vehicle is that cars lost most of their value in the first two years. Industry statistics have shown that a new car is going to lose about 30% of its value in the first year. The second year, it loses 20%. this means that after two years, the value of the automobile is going to be less than the loan amount. However, this will only be the case for a few years so a three year or older vehicle will probably not benefit from added coverage.

These are the circumstances where it may be beneficial to choose gap insurance. It's usually not required except by the lender potentially but should be considered carefully by new car owners.