Many mysteries and secret terms such as "power train" and "APR" are involved in purchasing a car, one of the least understood terms is "gap insurance." Knowing what gap insurance is, and is not, is important in understanding how much your car will cost and what you must do if your new car becomes a total loss.
Function
Gap insurance is almost always associated with the purchase of a new car and is usually brought up well after you have negotiated the price, settled on the terms of the financing, and are almost ready to drive away. Gap insurance is a supplemental insurance that covers the owner of the new car when the car is damaged beyond repair or stolen. It fills in the "gap" between what you owe on the car and what your insurance company will pay to replace the car. For example, if you borrow $19,000 to buy a car and it becomes a total loss--or "totaled"--after an accident a few days later and the insurance company declares it will pay only $15,000 to replace the car, gap insurance will cover the difference so the car owner can pay off the total amount owed on the car.
Misconceptions
Gap insurance is voluntary and is not required to legally drive in any state. In fact, some finance companies will not pay for gap insurance, considering it unnecessary. Typically, automobile dealerships will offer gap insurance on the day of purchase and hint, or sometimes state outright, that such insurance can only be purchased through them or on that day. Neither of these assertions is true. Several insurance companies (see Resources) offer gap insurance after the car is purchased, but before it is 12 months old.
Types
The types of gap insurance available differs from insurer to insurer. Some providers of gap insurance, for example, will not cover theft, particularly if the car is one that is known to be a target of car thieves. In this case, while the owners' comprehensive and collision insurance will cover the "appreciated value" of the car, the gap insurance will not cover the difference. Investigate the terms of the policy before purchasing it. Gap insurance is typically not offered on used or pre-owned vehicles, but in rare cases, some insurance providers will offer gap insurance on these cars. Also, some gap insurance policies will not only pay the difference between the insurance company's policy limit and the amount owed on the car, but also may cover the deductible you must pay through your regular car insurance.
Considerations
Gap insurance may not be necessary, even on a new car. Some automobile insurance companies pay what is called "replacement value" for your car. Even if your car is seven years old and is worth a mere fraction of a new car, policies with replacement value will pay an amount that would replace the lost car with a car of comparable quality or features. These policies are rare, however, and in addition tend to be more costly than normal "appreciated value" policies. Speak with your insurance provider to see what type of insurance policy you have before buying gap insurance.
Warning
Gap insurance is not the same as automobile insurance. If you do not have adequate coverage on your vehicle, you can still be liable for a large amount of money. If you drop your comprehensive and collision insurance on your new car, for example, and it catches fire, you will not be covered under gap insurance for the total amount owed on the car. Most gap insurance policies are deliberately capped to prevent such events; typically, gap insurance pays only a few thousand dollars at most. Gap insurance also is not considered "state minimum" insurance in any state; the term "state minimum" refers to "liability" insurance issued through a state-approved and bonded insurance company and is intended to protect the person that the policy-holder strikes in an accident.
For more information regarding Gap Insurance, please call us at 540.657.5633.
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