Congratulations! You’ve just gotten your new Ford, fresh out of the production plant. The car dealer flashes you a smile, and you return it as you take the keys from him. You rev up the engine, and drives out to the road and… BAM! An errant driver turns your new ride into a horribly deformed lump of metal.
Sounds ridiculous? This situation isn’t unheard of. However, the troubles don’t come from the accident itself, but the bills you’ll have to pay off from the accident. You might have given yourself a pat on your back for getting that auto insurance policy before you purchased your car. However, your insurance company might “total” your vehicle, and you can only claim the Actual Car Value (ACV) of your vehicle; you will have to pay for the difference yourself. And don’t be surprised – the value of your car decreases the moment the car leaves the hands of the car dealer.
So how do you insure yourself against this difference? This is where GAP insurance comes in.
What Is GAP Insurance?
Guaranteed Auto Protection (GAP) insurance insures you of the “gap” between the ACV and the amount you owe the car dealer or lienholder of a leased vehicle when you total your vehicle. “Totaled” is the condition of a car given by insurance companies when they deem that the costs of repairs on the car will exceed the ACV of the car. When a vehicle is “totaled”, the ACV of the automobile is calculated, and concluded amount is then claimed by the insured.
You might ask: Why is there a gap, anyway? Now, you must know that, as mentioned, the ACV of the car drops immediately after the car’s ownership has been passed from the dealer to the customer. In fact, the ACV of a car will drop 30% within 3 months! If you have not yet paid your debts to the dealer, and your ACV is lower than the outstanding amount, there will be a gap between these two sums. You will be responsible for paying this gap if you are not covered by GAP insurance.
Why Do I Need GAP insurance?
If you are able to pay the gap itself, you shouldn’t have to worry about GAP insurance, right? Well, GAP insurance is a form of giving you more financial resilience against unexpected circumstances. You might be able to pay the gap, but it’ll be a big blow to your financial reserves.
This is a very good example of how GAP insurance cushions yourself from unexpected blows to your income: Suppose you have paid $30,000 for your new vehicle. In 3 months, the ACV would have fallen by 30% to $21,000. If you were involved in an accident, and your car is “totaled” as deemed by your insurer, you will have to pay the difference of $9,000 by yourself. That’s a hefty sum to pay!
If you are unable to pay for the difference, you will have to slowly pay off the debt. As long as you have not paid up the outstanding amount, you will not be able to finance another vehicle. This is where GAP insurance comes in – for a nominal premium, you are guaranteed that you can finance another vehicle as soon as possible, because the GAP insurance will help cover you repay the full amount owed to the dealer or lienholder of your leased vehicle.
Benefits Of Having GAP Insurance
Saves You Money
Having gap insurance keeps you from having to scramble to find several thousand dollars to pay off your car loan when your car is totaled. Given that you will also need to buy another car, this financial hardship is enough to send many people into bankruptcy.
Peace of Mind
Can you imagine the stress of first totaling your beloved new car, worrying about any passengers who may have been injured in the accident (including yourself) and then realizing not only do you have to buy a new car, but you also have to quickly pay off the totaled one?? Gap insurance can eliminate a large chunk of this stress.
Get a New Car
If you have a few thousand dollars saved away, it’s better to put that toward a new car to reduce your auto loan than to put that money toward paying off a car you no longer get value out of. You won’t have a trade in, so anything you can put toward the purchase of a new car will help you get a better auto loan rate and lower monthly payment. Gap insurance helps you keep that money by paying off your loan on the previous vehicle.
Other Things To Consider
- Gap insurance is useful for the first three years of your car’s life, so if your auto loan extends beyond this period, check to see what the car’s value is versus how much you owe on the loan. Once these two numbers intersect, you can drop the gap coverage as it’s no longer useful.
- If you pay for your vehicle with cash, or put down 25% or more when you buy your car, gap insurance might not be necessary.
So, How Do I Go About Applying For GAP Insurance?
To apply for GAP insurance, simply contact your current insurance agent about adding GAP insurance into your auto insurance policy. They’ll be more than happy to help you – you’re helping them to make money. Your insurance agent will reassess your profile before giving you a quote. Remember to ask for discount; you might be able to get some discounts off your premiums, or pay lower deductibles for the same premium as you already bought an auto insurance policy with this company.
Sometimes, you might already be benefitting from GAP insurance – check with your insurance agent if GAP insurance is included in your insurance portfolio first before buying GAP insurance from another company!
There is no doubt that GAP insurance is very important. It provides the insured a level of financial stability by ensuring that there will not be any significant amount of expenses incurred. In the current world, where financial stability is described as volatile at best, this kind of insurance is of paramount importance. If you are not covered by this coverage, don’t wait! Go to your insurance agent, and ask for this coverage to be included now!