What Gap auto insurance offers?

Gap auto insurance is the name given to an additional insurance that covers the gap between the outstanding loan on an automobile and its present market value. Normal auto insurance covers only about 80 percent of the amount you pay for a car. The remaining 20 percent is uncovered. Therefore, in case of an accident, even with the insurance coverage you end up paying 20 percent of the cost. Gap auto insurance is a package that will cover this 20% as well.

Suppose you bought a $50,000 car and soon afterwards you have an accident. The insurance company will only be paying $40,000 and you will end up paying $10,000 from your own pocket. Gap insurance can protect you from this off chance loss. While most insurance companies now also offer Gap insurance; if your insurer does not cover you fully, you can buy an independent Gap policy.

The more expensive car you buy, the more important Gap insurance becomes otherwise you might have the unfortunate luck to pay thousands of dollars in damage. One might wonder why this gap is created. When you buy a new car, you may be on a fixed installment plan under a lease agreement. You will also buy an insurance policy. As soon as a car leaves the company lot, its value falls. So much so, that a car depreciates up to 30 percent in the first year of purchase. Now the insurance company insures the car on the fair market value which is less than the amount that the owner is paying in installments. Therefore there is a difference between the amount you pay for a car and the insurance cover. If an accident occurs, the buyer will still be paying the same amount on the installment, but the insurance will not cover the whole damage and this is where an additional cover is required. Provided you have Gap insurance, this difference will be paid. Therefore, a small investment seems quite appropriate if it saves you from paying thousands of dollars in case of an accident.

Gap insurance is often given by dealerships themselves, but some insurance companies offer it too. However, the rates offered by these dealerships are higher than what you might be able to find in the market. Therefore, it is best you make an informed decision. Do your research, spend some time and find the best deal. You can also get Gap insurance on a refinanced loan provided the institution is the same. If you refinance your loan with another financial institution, you will need to apply for a new Gap insurance. Gap is nontransferable in such events. If you change your vehicle, you shall need to get a new Gap insurance. Gap is only available on models that are at most 8 years old.

How would you know if there exists a gap? This is very simple to calculate. Check the outstanding loan or payoff amount still due under the lease agreement. Next check the market value of your automobile. If market value and the outstanding loan amount is the same, you can relax. There is no gap. If the outstanding loan is only a little over the market value, some people might even skip getting Gap insurance. Others might find it important to get a cover as soon as possible. Bear in mind that in case of an accident, you will be liable to pay the gap. It probably depends on your financial state, your behavior and risk averseness whether you apply for Gap car insurance. Some people are extremely risk averse and might not want to pay the extra amount.