What Is The Purpose Of Gap Insurance?
If you are financing or leasing a vehicle, you should consider purchasing gap insurance. GAP insurance is an abbreviation for Guaranteed Asset Protection. It is intended to pay the difference between the amount you owe on your automobile and its true worth if you are in an accident and your car is wrecked.
If you are involved in a catastrophic accident, your insurance company will assess whether or not your vehicle is wrecked. The categorization is determined by the amount of insurance you have and the current value of your vehicle. This is how the insurance company calculates your compensation.
Car insurance packages cover the actual cash value (ACV) of your car, which includes depreciation. An automobile loses around 20% of its value in the first year of ownership. When you finance an automobile with a loan or lease, you make monthly payments on it and do not own it entirely.
In some circumstances, your vehicle's ACV may be less than what you owe your lender. For example, suppose you rented a car that was worth $20,000 new. You still owe $18,000 three years later. Your automobile, on the other hand, has depreciated dramatically in those three years, and its ACV is now $14,000.
How Can I Obtain Gap Insurance ?
If you are in an accident, your insurance company will compensate you based on the depreciated worth of your vehicle—in this example, $14,000. You still owe your lender more than the ACV value, which is $18,000. The amount you owe the lender is greater than the cost of replacing your automobile. This is where gap insurance may help.
Gap insurance pays the difference between what your insurance company will pay you after an accident and what you owe on your automobile. Assume you had $14,000 in damage plus a $500 deductible in the preceding scenario. Your insurance company would assist cover the $3,500 difference you still owe on the lease if you had gap insurance, rather than you having to pay the entire amount out of pocket.
The process of obtaining gap insurance differs somewhat from that of obtaining normal automobile insurance. Gap insurance may be purchased in three ways: through your insurance provider, your lender, or a third-party firm.
Gap insurance is available from the majority of major vehicle insurance companies. This may be added to your existing auto insurance policy as an add-on. This is frequently the least expensive alternative.
When you sign the contract for your auto loan, you can receive gap insurance from your lender. The cost might be applied to your monthly loan installments. Similarly, you may obtain gap insurance from the automobile dealership where you are leasing. Gap insurance is often sold as a one-time cost at the dealership.
There are also third-party firms that just sell gap insurance. This includes firms such as Gap Direct and AAA.
Should I Purchase Gap Insurance?
Purchasing gap insurance is a personal choice. Purchasing gap insurance may be a beneficial option for certain people, since it may shield them against unwelcome risks. Gap insurance, on the other hand, is not required for all drivers. Before selecting to get gap insurance, you need to consider various considerations.
Drivers who are leasing a car or repaying a car loan would profit the most from gap insurance. You must specifically calculate how much your automobile is now worth in comparison to how much money you owe the lender. It makes no sense to buy gap insurance if you owe less than the market value. However, gap insurance is a smart alternative if you owe more than the current value.
It should be noted that gap insurance might be useful for persons who own a new or used automobile. Both types of vehicles deteriorate faster than you would imagine. Even if you haven't had any accidents, the value of a new automobile will drop dramatically after a year or two.
What Is The Cost Of Gap Insurance?
To obtain gap insurance, you must already have a vehicle insurance policy that covers comprehensive and collision coverage. Gap insurance is a separate policy that must be paid for separately from your regular auto insurance payment.
Having gap insurance will raise your auto insurance costs somewhat, but not much. Gap insurance typically adds roughly $20 to your insurance coverage each year, according to the Insurance Information Institute. Depending on where you get gap insurance, this might be a one-time price or a monthly fee of a few dollars. The cost of gap insurance may also vary depending on the supplier.
Gap insurance, regardless of where you buy it, is a low-cost option that can provide significant coverage. Without gap insurance, you might be obligated to pay thousands of dollars to your lender for a wrecked and useless vehicle.
The Main Points
Gap insurance may be necessary for persons who lease or finance their vehicle. Purchasing gap insurance is a personal decision. To see if you should acquire gap insurance, calculate the current worth of your vehicle and compare it to the amount you still owe your lender. Gap insurance is a wise investment if you owe more than the current value.
If you are in an accident and your automobile is wrecked or stolen, gap insurance will assist you in repaying what you still owe on your car. Gap insurance can be purchased through your auto insurance carrier, your lender or dealership, or a third-party firm. Before acquiring insurance, shop around for the greatest price.
If you're on the fence about buying gap insurance, be assured that it won't break the bank. Gap insurance is a little amount to pay for excellent coverage, with an average annual cost of just $20. Before adding gap insurance to your policy, be sure you have collision and comprehensive coverage.