People generally think they know all there is to know about auto insurance. But then along came gap insurance. Gap insurance is an absolute necessity for leasing a vehicle, however trivial it may seem. If a small down payment was made at the time of purchasing a car, then gap insurance could just prove to be a lifesaver. Let’s first understand what it is.
What a traditional auto insurance policy does not cover is covered by the gap insurance. If your car is totaled in a mishap or stolen, and you owe the company some money then gap insurance can close that gap.
How does gap insurance really work?
Let’s examine a test case. A person bought a car around 2 months ago for $25,000. He chose to pay $500 a month, at an interest rate of 6 percent. Then one day a tree fell onto it absolutely flattening it to a sheet. The person calls up the insurance company and files a claim. The insurer through some very discreet methods decides that at the time of the crash the value of the car was $20,000. The car isn’t old at all, just 2 months, and has already lost so much of its value. However the amount that he owed to the finance company still stands; they still expect every cent back. The license fees, interest and tax out together brings it up to $27000. The man is mortified. There’s a gap of $7000 between what the insurance company has agreed to pay and what the finance company expects. This is where gap insurance works.
If someone buys a car without making a large down payment, then in the first few months he owes more to the insurance company that he is likely to get from the insurance company in case his vehicle is stolen or totaled. This is the reason why gap insurance is such an important thing for most drivers. In fact it is included or mandated by the lease contract, which is the situation in most cases. If gap insurance doesn’t seem to be included in the insurance policy, it can be purchased separately at an additional cost.
Gap insurance for leased cars
Depending on the coverage of the leased car, it can be decided whether or not gap insurance is necessary. Gap insurance is not required when the regular insurance policy has the provisions to fully pay off the financed amount.
Keep in mind
Gap insurance should preferably be bought right at the beginning of the lease term. The client must comply with all the lease terms. If the client does not have comprehensive or collision coverage, the company has the right to not honor the gap insurance that is purchased. Comprehensive and collision must be carried at all times according to the terms of the lease contract. There are a few companies that insist on you making payments towards the loan, till the money from the gap insurance comes through. This is the reason why one must follow all requirements as laid down by the insurance company in the event of car being stolen or totaled.
Before you buy an auto insurance policy, recall whether or not you would like to buy gap insurance as well. In the event of an accident, there’ll be no regrets about that decision.