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How Do Insurance Companies Profit from Gap Insurance


Most people do not have the means to purchase a car in lump sum payment. Instead, they get a car loan so that they can pay on a staggered basis. Since they are driving a car that is not yet fully paid, they make sure to have it insured. Some choose to get gap insurance because of its advantages.

This type of insurance covers the amount of the market value of a car at the time it was bought less its depreciated value at the time of accident. If a one-month old car is suddenly wrecked totally due to collision, what happens to the car loan? The driver will still be required to complete payment on his loan. His claims from gap insurance will take care of this problem.

Gap insurance has an extensive coverage that should lure many motorists to buy it. However, how come it remains to be unpopular? In fact, only a few opt to buy it. The main reason is the steep premium rate attached to this insurance policy. It is way too costly for many people’s allotted budget. They have to settle for another type of insurance and hope that nothing bad will happen to their cars.

Gap insurance is not that popular because not that many people can afford it. In fact, it is precisely one of the reasons why they got a car loan in the first place. With this in mind, some people are forced to think of how insurance companies manage to profit from it.

Insurance companies follow certain guidelines when computing for premium rates. It largely depends on the features of a policy, a client’s driving history, and car model. Generally, the higher the risk, the higher the premium imposed. Insurers keep this mind when they compute for rates. After all, as much as they wish to service their clients, they have to profit as well to stay alive in the industry.

They must be able to achieve a certain sustainable level to stay in business. This level is attained when there are enough clients purchasing insurance policies to reach minimum sales required to break even at the very least.

Knowing how difficult it is to sell gap insurance, insurance agents are given bigger sales commissions for every successful sale. Insurance companies also tie up with some car manufacturers. By default, this is the insurance policy included on most cars for sale. Some buyers are not aware of this. Hence, it is always important to ask what insurance coverage is included whenever they buy a new car.