If your car is totaled by an accident, fire or theft or such other disasters, and when you make a claim on your auto insurance policy, your insurance company will pay the Actual Cash Value of the vehicle. This amount may be less than its market value. If you owe money on your vehicle and the outstanding payment of lease amount, the insurance pay off will be much less than the amount owed.
If you have protection of GAP insurance it will pay the difference between the actual cash value of the vehicle and the amount that you owe towards your loan or lease on the vehicle. GAP insurance is your protection for your loan or lease on the car. It may also pay for your deductible on your auto insurance. This protection is highly valuable when the car is bought on lease and it is still new especially when the difference in value of your deductible and the loss caused by the financial deficit is significant which is called the “gap”.
The following example will explain how GAP insurance is calculated:
Normally a new car loses its value by 30 percent of its purchase value in 3 month’s time. For a car of $24,000 purchase price with actual value of $22,000 and you owe $23,500 on your lease at the time of purchase. If your deductible is $500 and the actual value of the car is $22,000 your insurance policy for physical damage will pay $21,500 which is $22,000 minus $500. GAP insurance will pay the difference between what you actually owe on your lease and the physical damage compensation the insurance company pays after adding your deductible which is $2000.
Physical damage to a new car which is leas than three months old will cause a loss of 30 percent of value. So the out of pocket expense in case the car is totaled will be from $4800 to $7200 for a car costing $24,000). This is the amount owed even if you have full coverage for the vehicle.
Gap Insurance Terms and Conditions
The GAP insurance maximum limit is $50,000.
The GAP claim settlement will not cover the penalties and late charges owed to the lender.
The GAP settlement may not cover the entire GAP amount that is due if your car’s finance amount is more than 120 percent of its retail value.
Gap insurance applies to loans of cars financed for $100,000 or less.
The car lease term should be below 84 months.
There should not be a balloon payment at the end of the term.