Most of you might be under the impression that your auto insurance is all that you are going to need in order to give your financial freedom in case of an accident. But think again. If you have brought your car under a lease or a loan, you owe money to someone for the vehicle.
A lease or loan is given out for a long period of pay back time. It can be up to 5 years or even7 years. If your car is totaled during this period, you will still have to pay the entire amount that you owe to the insurance company. There is no second question about that.
Let us consider a real life scenario. You buy a car through a lease for $25000. Your installments are $500 per month at an interest rate of 6 percent. If you do have the misfortune of meeting with an accident after a year and your car is totaled. A car is said to be totaled when the cost of repairing it is more than 50% of the net value of the car. If this happens, you still owe the insurance company the entire amount. This will be around $27000 along with the added interest amount. But when you go to your auto insurance company, they will give an estimate for the car based on its depreciated value. This will be around $20000 after a year. So now you owe $7000 to the financers from out of your pocket! This can be a disaster for someone who has saved up for years to get their first dream car.
This is where gap insurance comes into play. In most cases, the leasing company will provide gap insurance along with the loan or lease. This will remove a lot of hassle from the entire process. You do not need to go around shopping for a policy. And in other cases, the lease policy will come along with a gap waiver. This will remove the need for you to go out and get yourself a gap policy. Because the financing company will entirely overlook the gap value in the case that your car is totaled. But if the lease that you have does not contain either of the above clauses, you must get a gap insurance policy on your own.
There are some more things that you need to be aware of while getting gap coverage. In most cases the gap insurance will not be honored if you do not have collision and comprehensive coverage. And also you can get a gap insurance policy during any period of the lease. It is not that you have to get one when you initiate the lease. You can take your time and get the right policy even later on during the lease period. But try to get one as soon as possible because if you delay it, you might end up paying heavily in the case of a serious accident.
If your car is ever totaled or stolen, you will have to continue making the payments to the financer as agreed. The auto insurance company is a totally different entity. You will have to sort out your issues with them and get the money from them to replenish what you have already paid to the financer. This hassle of coordinating in between the two agencies will not be there if your lease agreement itself has a gap insurance waiver or policy associated with it.