Gap Insurance: A Financial Safety Belt
Do you worry about the possible consequences of a lapse in your auto insurance? It's not unusual for a person to be without this coverage for days, weeks, or months. Gap insurance is designed to bridge the gap between what you have missed and what you may need in order to pay when your car is totaled. But if it’s not worth buying before an accident, should you just not bother with having auto insurance? The answer is no.
Gap insurance is just one of the many options that you can get from an auto insurance agent. Another option would be a deductible reduction. You’ve no doubt heard commercials for this, as well, with the catchy phrase “Safety is priceless; insurance is cheap.” Still another option is to shop for a new policy. If you have multiple cars, it may be cheaper to get one coverage rate for all your cars rather than having multiple policies at once. And finally, there’s collision coverage; this will be discussed in more detail below.
Gap insurance may seem like a good idea, but is it really? Some say yes; others say no. Before you decide for yourself, let’s take a look at gap insurance and find out what it adds to your auto policy.
What is it?
The exact definition of gap insurance can vary from state to state. In general, however, gap refers to the difference between what you owe on your car and its actual cash value. Cash value is the value of your vehicle minus the cost of repairs or deductibles that have already been paid out. So if your car’s actual cash value for the year is $3000, and you owe $2000 on it, then the gap is $2000. If your car has been totaled in an accident and you have to pay out more than the car’s current market value, gap insurance will help pay the difference.
Gap insurance will not protect you from all expenses that would result in a loss of a vehicle; it doesn't replace collision or comprehensive coverage. It will only cover damage that exceeds what you already owed on your vehicle. If you had $500 worth of damage but owed $4000, gap insurance won't cover anything other than that extra $1000. In fact, it's often cheaper to buy collision coverage if you tend to do a lot of damage.
The other side of the coin is that gap insurance isn't necessary for all people. There's no reason why you need this coverage if you have collision or comprehensive coverage, since these coverages will provide any losses they're designed for. It's unlikely that gap insurance would be needed more than once or twice in your life .
However, there are some situations in which gap insurance becomes necessary:
You own a car with a very depreciated value; $2000 sounds like a lot of money in today’s economy, but it’s peanuts next to the actual value of an auto. In fact, the average value of an auto is $3900 according to Kelley Blue Book. What would you do if your car was totaled? The cost of repair could be upwards of $3000 or $4000, and depending on your deductibles, you could still be out hundreds or thousands more. Gap insurance will pay the difference between what you owe and how much your insurance agency would actually give you for your car.
You have a limited time to pay off what you owe before the loan company takes possession of it; this is especially true for people who lease their cars rather than own them outright. The upside to having gap insurance is that if you’re facing a larger than average loss, the coverage will be cheaper than the policy for your other cars.
You've already had many accidents, and your insurance carrier has many claims on file. Your likelihood of having another accident increases, and you could wind up losing your car by having a number of claims filed against it. If you want added protection, then have gap insurance. Whether or not it's worth the cost depends on how much you've had to pay in previous accidents .
You have a very low deductible so that it appears as though you have full coverage; however, gap insurance can bring down the average cost of auto policy considerably. If your deductible is only $500, then gap insurance in the amount of $2000 will be cheaper than buying comprehensive coverage to cover the same.
How does it work?
Gap insurance may be purchased in an amount that is a percentage of what you owe, or in an amount that is fixed no matter what you owe. For example, if your car is worth $5000 and you owe $2000; the actual cash value (ACV) is only $2500. This means that the gap between what you owe and what your vehicle’s worth would be only $1000. You can buy gap insurance for half of this amount, or for whatever other amount you choose.
To pay for it, you can either add the cost of the gap coverage to your total monthly payment or have it taken out of the payoff amount on your loan. You can also pay with a credit card and you may be able to roll it into a new loan; this makes paying for gap insurance easy, but also convenient if you change car loans or finance companies. For example, if you buy your car from Loan Company A and later decide to get a new vehicle from Loan Company B, your state insurance department might require that you transfer the gap coverage over to reflect the new car's value. This is because each company calculates how much its auto policies will cover separately .
Some people think that gap insurance is just an extra charge on their insurance. In reality, it’s not your auto insurance company’s fault if you have a gap between what you owe on your vehicle and the value of the car; this is what you have to live with. If you want to estimate how much it will cost to cover a gap, just multiply whatever amount you owe by 100% plus one-tenth of that amount. For example, $2500 multiplied by 1.1 equals $2640; the actual cash value (ACV) of your car is actually only $1000 more than that .
Depending on where you live, gap insurance may not even be available for the car you own. If you do want to buy it, be sure to read the fine print in your auto policy to see if it’s included or not. In some states, drivers are required to have gap insurance; however, in other states it's optional. The downside to having gap insurance is that if the car is totaled and there's a lot of damage, then the balance might not be covered .
For example, say that your car was worth $2000 and you owed $1500; then there would be a $500 gap between the two amounts.
Conclusion
Gap insurance is one of those things that are helpful and not worth the money, depending on your situation. However, if you really need it for any reason, then it’s certainly worth a look. At the time of this writing, gap insurance cost about $200 per year or $7.50 per month; it’s also available as low as a few dollars a month in some states. The coverage costs will vary depending on where you live and what type of coverage your car has; gap insurance is also very popular among people who buy used cars .
Sources:
http://www.lawyersincaraccidentcases.