When getting a car lease, the common question that you often ask is: “What if my car encounters an unexpected vehicular accident?” When this happens, insurance should be able to take care of all incurred damages, so that should be one problem solved. However, since car manufacturers still assume ownership of leased cars, technically speaking, they can easily demand payment for any form of damage that their car suffered from. It is under this scenario where gap insurance and its corresponding coverage become significant.
Unlike traditional auto coverage, gap insurance does not provide complete protection for vehicles that get involved in road accidents. In very simple terms, this insurance type bridges any gap that may exist between the value of a vehicle and the amount owing to a finance company with which an agreement of lease has been signed. Put in another way, gap insurance pertains to any amount insurers will pay in case your car gets damaged or gets stolen after deducting the present car value and the remaining balance on an auto lease agreement.
To illustrate, let us assume that about three months earlier, you purchased a car worth $25,000 under a lease contract. You then start paying $500 monthly as per an agreed 6% interest rate. Then a cyclone hits your area, causing extensive damage to your car.
After filing for an insurance claim, you were informed that your insurer will only cover $20,000 based on the present value of your car. The lease company, meanwhile, demands full payment, and after it has made its computations which include interest, license fees, and taxes, they now ask you to pay them a total of $28,000.
You now have an unresolved balance of $8,000 on your hands, after subtracting the $20,000 coverage amount from the $28,000 payment demand from your leasing company. This is where having a gap policy becomes significantly important.
Normally, gap policy coverage is included in an auto or vehicle lease contract. Under this condition, you should make it a point to closely examine your contract terms, particularly the amount covered and the monthly premium.
In other cases, leasing companies require people to secure such an insurance policy before a deal is closed. Under this scenario, you will need to shop around for several insurance companies and ask what kinds of coverage they can offer you. When doing so, it should not come as a surprise if these companies provide you gap insurance even months after signing an auto lease contract, since this is a normal practice.