You may think that your auto insurance protection covers all the bases, but that may not be the case. One way to make sure you are protected in the event your vehicle is totaled in an accident is to secure what is known as gap insurance. Here is what you need to know about this type of coverage, how it works, and what could happen if you choose to not secure this added protection.
As the name implies, gap insurance is a type of auto coverage designed to take up where your insurance company leaves off in terms of preventing financial hardship. This is because the insurance helps to make up the difference between what you owe on that totaled vehicle and what the insurance company is willing to provide in the way of a settlement. Without the coverage, you could end up having to manage that difference out of your own pocket.
How Gap Insurance Comes to the Rescue
Consider what would happen if you purchased a new vehicle several months ago and it’s totaled in an accident. There is a good chance that your insurance provider will determine the settlement offered to you based on the vehicle’s current value and not what you still owe. Even if you accept the offer, there is still an outstanding balance on your car loan. How will you take care of that balance?
If you have gap coverage, the plan will make up the difference between what you owe on the totaled car and what the insurance company is willing to pay. For example, you could still owe a few thousand dollars after handing over all the settlement money from the claim to the lender. If you have gap insurance, those few thousand dollars will be suppled and the loan will be retired in full.
What About Leased Vehicles?
You may think that this type of coverage is only helpful to those who are purchasing vehicles. The fact is that having something in place to cover any balances left after a leased vehicle is totaled is a must. That’s because the individual leasing the vehicle is responsible if the car is stolen or destroyed in an accident.
It’s true that the contract with the car leasing company does take into account how much has been paid on the lease up to the time of the accident. Keep in mind that amount is likely much lower than if the individual was purchasing the car and making payments. The remaining balance could be significant even after other types of coverage have settled most of that balance. With gap coverage, little to nothing is paid out of pocket. The lease terms and conditions are fulfilled and the client is free to lease another vehicle if desired.
One thing that you may not know is many leasing companies require gap insurance as part of the conditions for obtaining a lease. This makes sense because the plan does protect the interests of both parties. Along with preventing out of pocket expenses for the client, the coverage also ensures the company providing the lease does not sustain a loss.
Does the Coverage Make Sense for Everyone?
While securing gap insurance is a smart move for many consumers, not everyone needs it. For example, if you don’t have what is known as an underwater car loan the coverage may not be necessary. An underwater situation means that you owe more for the vehicle than the value assigned to it by your insurance company. When you own a vehicle that retains more value over a longer period of time, the gap in coverage may be so small that you don’t have to be concerned about dealing with any out of pocket expense after the car is totaled.
Many people choose to secure gap insurance and maintain it as long as they have an outstanding balance on a car loan or are in the middle of a leasing arrangement. Once the debt is paid in full, they can feel more comfortable dropping the gap coverage.
Only you can decide if this type of insurance is right for you. Talk with an expert and consider all aspects of your financial situation. If there is any indication that this type of additional coverage would protect you financially, it’s worth the investment.