You have heard about Gap Insurance, but you really do not know what it is. Of course, your dealer mentioned that it will save your pocket should your car get wrecked, but he did not explain it to you. In fact, there are a lot of instances where people have heard about this type of coverage, but will not be bothered to get it just because they do not understand what it is and what it can do. Here is a brief overview of what you should know.
Gap insurance takes care of things that your conventional car insurance policy does not. What does this mean? Your conventional car insurance program will indemnify you for any damage your car sustains, or for any repairs that needs to be done.
Gap insurance comes into play when buying a vehicle. There are only a few occasions where someone buys a car at full price in a single transaction. It is common that a prospective owner pays the cash-out expense and drives the car home, with the remaining balance to be paid as periodic amortizations. This is what this coverage policy deals with – the remaining amount you have to pay.
Suppose you are driving along the road and suddenly another car slams into you. Your car is in need of substantial repairs, with several parts that need replacing. What is worse, you just got your car this morning and you have not even started to pay your monthly amortizations. What do you do?
This is where you will fully appreciate gap insurance. At the exact moment your car’s tires touch the pavement, say goodbye to 25% to 50% of your car’s value. A $60,000 SUV can depreciate to $40,000 the moment you drive it out of a showroom. Moreover, the dealer is going to charge you full price, less the amount you paid as a cash-out payment. Naturally, your insurance will not cover the full amount because conventional car insurance is dependent on the car’s actual value – and that is limited to the $40,000 maximum of your classy SUV.
Now, if you were wise enough to get this type of coverage, you can still expect to sleep soundly the following night. This policy is meant to answer for the gap – that is, the amount between actual value of the car and original value. In the case of your classy SUV, an insurer will answer for the $20,000 difference. This way, the only additional cost you have to pay is for premiums. Better to pay a few hundred dollars for premiums than a few thousand for damage, or so they say.