What is Gap Insurance?
Gap Insurance happens to come up quite often when people are buying new cars. At one point in my life, I was actually in the car business so I know all about GAP insurance. Basically in a nutshell, gap insurance is coverage that exists on a car if you owe more than what the car is worth and it's totaled. It comes into effect only if that happens, so usually gap insurance is used on vehicles where a loan is taken out on the vehicle.
How does Gap Insurance work?
Let's say you go out and buy that car you've always wanted. It only sets you back about $40,000 and you are trying to leverage it as much as possible because you want to keep all your cash in savings. So you end up putting $1000 down and finance the rest which costs you about $600 per month. You and I both know that as soon as you drive a car off the lot, it's worth a lot less than what you purchased it for. You would need gap insurance if you didn't put any money down because the vehicle is worth less now, that's just how it is.
So you are cruising down the road a few months later with the top down and you end up in a car accident totaling the car. Your baby is now totaled and you want it fixed. The insurance company tells you that your car is now only worth $33,000 however, you still owe approx. $37,000 on your loan. Ouch right? Someone has to pay off the loan against the car. Well instead of you coming out of pocket to pay the difference, your gap insurance would cover the difference between what the car is worth today and what you might owe. It covers that "GAP" and then you can get a new car.
Gap insurance usually only makes sense whenever to think you will owe more than what the car is worth. So if you decide to get a loan on a new car, NOT to come up with a large down payment or roll in all the costs associated with new car purchases, maybe even add on the costs of getting out of an old car, etc, you would want gap insurance. If you're paying cash or put down a large sum of money, you won't ever have to worry about a difference in the event of an accident.
Now keeping all this in mind, next time you buy a car, make sure you look at the paperwork to see the gap insurance and how much they are charging you. Sometimes they will sneak coverage in the paperwork, even though you may not need it.
If you are leasing a vehicle, more than likely you will have gap insurance. This is because of the residual value and how a lease is structured. Whatever the length of the lease, you will always be upside down so to speak right up to a few months before you have to give the car back. So almost always you will need gap insurance.
For all you other insurance needs, whether it be auto, home, life or health, give us a call or fill out a quote and we'll make sure we give you the best rates. We can because we are independent.