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Understanding GAP Insurance Better


GAP insurance is often taken for granted because many people do not understand how it works. Before attempting to explain what it is, first, it is important to understand the market value of cars. Cars are machines that begin to depreciate by 20 to 30 percent once it is taken out of a showroom. These are not brand new anymore, instead they are considered slightly used or used. If drivers figure in an accident, insurance providers will calculate claims based on its depreciated value.

It may sound unfair because car owners are amortizing on the brand new price and not on its depreciated value. They automatically incur losses if insurance companies will not cover its full value at the time a car was bought. This is where GAP insurance comes in handy. It attempts to settle the difference between original price and depreciated value. The insured will still be able to pay for his dues no matter what happens.

For example, someone purchased a brand new car for $50,000. After he rolls it out on the road to start using it, his car depreciates at once by 20 percent, sinking its actual value to $40,000. He is very careful and defensive in driving. He knows it is difficult to purchase another car. However, after a week, a reckless truck driver collides with his car, rendering his slightly used vehicle irreparable.

If he got standard insurance coverage, it will only cover up to $40,000 worth of damages even if he is amortizing it in the bank for $50,000. The $10,000 difference is considered a loss already. However, if he applied for GAP insurance after buying his car, he gets to enjoy full insurance coverage of $50,000.

Obviously, this insurance is meant for those who defer payments on their car purchases. In today’s difficult times, many people opt to pay on installment rather than buy vehicles on a cash basis. Because of this, the market for this type of insurance becomes abundant. Yet, only a few so far are insured with GAP. The rest either think they do not need it or they find it too expensive for their limited budget.

The question of necessity is quite difficult to answer because it depends on how much of a risk taker a driver is.  One driver may think that his chances of figuring in an accident are very slim and decides that standard auto insurance will do for him. However, for another who thinks that anyone could belong to that slim margin of accident rates, he does not take risks and applies for GAP insurance.