Gap insurance, of course. The “GAP” in gap insurance stands for “Guaranteed Auto Protection.” If an auto accident occurs, this insurance can protect a driver from having to pay the potentially significant difference between: (1) the amount the driver owes on his car loan; and, (2) the car’s estimated value.
Yes, insurance issues always have the likelihood of confusing. Gap insurance, however, is relatively straight forward. Let’s take a further look.
What Gap Insurance Covers and How it Works
Gap insurance typically comes into play when the driver of a car: (1) owes on a loan related to that car; and, (2) gets into a car accident where the same car is totaled (also called “total loss”). In this situation, the driver’s collision coverage will only reimburse the driver for the current market value of his car. An insurer will not cover any amount of money that the driver may still owe on his car loan.
Gap insurance was designed to provide extra coverage in this type of scenario. Let’s consider a hypothetical. Assume Fred purchased a car for $20,000. At the time of purchase, he made a $2,000 down payment and took out a loan for $18,000.
Now, further assume that within a few months of his purchase, poor Fred was involved in an auto accident that left his new car completely totaled. Fred still owes $18,000 on his car loan. But, what happens once a buyer of a new car drives off the lot? The car goes down in value.
After the collision, Fred’s insurer estimates that the fair market value of his new car is $16,000. The insurer pays Fred this same amount via Fred’s collision coverage benefits. In the end, Fred is left paying out-of-pocket for the $2,000 difference between the amount he owed on the vehicle and the amount he was paid by his insurer.
Now enter gap insurance. Gap insurance essentially eliminates the deficit that Fred is left to cover out-of-pocket. If Fred had gap insurance, then his insurer would have reimbursed him for the full $18,000 that he owed on his new vehicle. In other words, gap insurance fills the gap between the fair market value of a totaled car and the amount still owed on that car.
An insurer must provide gap insurance if an insured asks for it. But, this begs the question of whether a driver should even ask for it. The answer to this question depends on a few considerations.
Please note that gap insurance is often required as part of a lease agreement. Thus, if a driver leases a car, the lease agreement will typically include gap insurance into the overall equation. Here, the driver is left paying a fee for the additional coverage.
In a non-lease situation, it’s up to the driver/purchaser of the car to determine whether gap insurance is in his best interest. An important thing to keep in mind is the down payment amount paid at the time of purchase. The smaller the down payment amount, the more important gap insurance becomes.
Please also understand that there are limits on how much a gap policy will pay. Your particular insurance carrier will be best equipped to detail these limits. Further, gap insurance may be limited to those policy holders that also have comprehensive and collision coverage. Once again, your particular insurance carrier will be best equipped to discuss these issues.
A final consideration is Phillips Law Firm. If you have any questions on whether Gap insurance is right for you, simply contact us. Further, if you recently purchased a car and fell victim to a total vehicle loss, let our talented team of attorneys lead your way. This team is experienced, dedicated, passionate, and ready to answer your call now!