True to its name, gap insurance closes the gap between the amount your auto insurance company pays you and what you owe the finance company in the event of your car being stolen or totaled due to an accident. It is important to know that GAP insurance can provide you the valuable and essential protection during the first years of your car's life, especially when you have purchased your car using a lease or loan.
So when you are considering a car loan or lease, don’t forget to ask your insurance agent or loan officer if Gap insurance can be included in your auto insurance. In the event of an unfortunate accident that results in totaling your car, you'll be thankful that you have made a wise decision in buying GAP insurance.
It is understood that gap insurance is necessary when you finance your vehicle to protect against huge financial loss in the event of an accident with your car being totaled. Deciding if you need GAP insurance can be confusing as it involves a good amount of risk management and calculation like calculating any auto insurance package and picking options. Anyway, it depends on the coverage you have purchased in your auto insurance. If your regular auto insurance policy can pay off the entire financed amount, you don't need gap insurance.
Let us consider a situation where your car is bought on loan or lease and you are making monthly payments. In the event of a crash and your car being totaled, GAP insurance will pay for the difference between the redemption value of the car and the amount owed on the car loan or lease. Since it fills up the gap between these two amounts, GAP insurance is made a requirement by most leasing companies and lenders. Without Gap insurance you will have to meet the huge amount from personally. It is imperative to include GAP insurance in your auto insurance package.
Cars lose about 20 to 30 percent of their value within 3 months use. New cars usually depreciate with passing years. If your car is stolen or wrecked, your insurance company will pay you the depreciated value of your car only. When the amount you owe on the car is more than the money that your auto insurance pays you, your GAP insurance is your best option. There is always a strong probability that and gap will exist between the amount owed on your car and its actual value. It is more valuable if your car is new at the time of the mishap. Since the difference in these two amounts can run into thousands of dollars, it makes good sense to purchase GAP insurance.