What is Gap Insurance?April 29, 2016
If there’s one type of car insurance coverage that isn’t understood, it’s gap insurance coverage. A widely used coverage type, gap insurance is there to protect you in the event that you are involved in an accident in a car on which you are making payments (lien or lease payments). But why should that coverage be any different from typical car insurance coverage? Compare.com breaks down gap insurance coverage and what it means to you.
Why you need gap insurance coverage
It’s all about depreciation. If you purchase a car for $25,000, it will decrease in value the instant it leaves the car lot (somewhere between a 10% and 20% loss). So if you leave the lot with a $25,000 car, it instantly depreciates to around $23,000. Now, if you leave the car lot and get into an accident that leaves your car declared a “total loss”, the insurance company will pay you for the value of the car after depreciation. This means you get paid $23,000 for the loss of the vehicle, even though you still owe $25,000 on the loan. The same scenario also applies if that brand new car is stolen. Gap insurance is there to pay the difference between what you owe and what your insurance paid for repair or replacement.
Things to know about gap insurance coverage
It’s very common for a company leasing a vehicle to require that you, the lessor, carry gap insurance for your leased vehicle. If your lease contract does not require you to purchase a specific gap insurance policy, you should shop around to get the best price. Comparing prices is the best way to make sure you’re not paying more than necessary for your gap insurance coverage. Unfortunately, compare.com doesn’t offer gap insurance comparison at this time. Gap insurance, though common, is a bit of a specialty product. Your best bet is to work with a broker to find out which car insurance company can offer you the best deal on your gap insurance. (If you’d like to avoid having to carry gap insurance at all, read our car buying guide for car shoppers on a budget in our resource section)
It’s also a good idea to read your gap insurance policy carefully to see if it requires you to have comprehensive and collision insurance coverage as well. If so, you would not qualify for a payment from the gap insurance unless you also carried comprehensive and collision insurance coverage. Sometimes the auto insurance company or even the lease agreement may require that your coverage meet certain minimum limits to ensure that there is enough auto insurance coverage to pay for damages.
If you have trouble understanding the terms of your gap insurance coverage, compare.com recommends contacting your agent for assistance.
Auto Insurance A to Z
It’s easy for a lot of folks in auto insurance to forget that most people don’t know what they’re talking about when they refer to liability coverage, or an SR-22. Our Auto Insurance A-Z Guide helps decrypt things, unpacking these concepts into language you and I can understand.