Auto insurance is a must for those who own a car, and it comes in different forms. One of the types of coverage you may have heard of is “gap coverage”. This type of insurance fills the gap between what you owe on your car and the actual cash value in the event that your car is totaled or stolen. In this article, we’ll explain what gap coverage is, why you might need it, and how it works.
What is Gap Coverage?
Gap insurance, also known as “guaranteed asset protection insurance”, is an optional type of insurance coverage that pays the difference between the actual cash value of your car and the amount you owe on your car loan in the event that your car is totaled or stolen. This type of coverage is not mandatory, but it can be useful for individuals who owe more on their car than it’s worth or who have a long-term car loan.
For example, let’s say you purchased a new car for $25,000 and took out a loan for that amount. A year later, your car is totaled in an accident. However, the actual cash value of your car is only $18,000 due to depreciation. If you don’t have gap coverage, your insurance company will only pay you $18,000, leaving you responsible for the remaining $7,000 on your car loan.
Gap coverage will pay off the remaining $7,000 on your car loan, so you won’t be stuck with a car loan for a car that you no longer have.
How Does Gap Coverage Work?
GAP coverage works by covering the “gap” between what you owe on your car and the actual cash value if it gets totaled or stolen. Most insurance companies offer gap coverage as an add-on to your existing comprehensive coverage, collision coverage, or both.
This coverage can be beneficial for those who have financed their car and have a loan or lease. Unlike most insurance policies, gap insurance does not pay for repairs or medical bills; it’s specifically intended to cover the difference between your car’s actual cash value and the remaining balance of your loan.
Who Needs Gap Coverage?
Gap coverage is not mandatory, but it can be beneficial for certain individuals who are at risk of “upside-down” loans. This situation can occur when the amount you owe on your car loan is more than the car’s actual cash value.
If you have financed your car with a long-term loan, or have a high-interest rate, you may be at risk of being upside-down. Additionally, if you have put little money down on your car or have a low credit score, you may also benefit from gap coverage.
It’s important to note that gap coverage is only applicable to new or leased cars, as the value of used cars is often already so low that the gap between the loan amount and actual cash value is small or non-existent.
How Much Does Gap Coverage Cost?
The cost of gap coverage varies depending on the insurance provider and the value of your car. Generally, gap coverage costs around $20 to $40 per year if added to your existing auto insurance policy. However, if gap coverage is purchased separately, it can cost several hundred dollars.
The exact price will depend on several factors, such as the type of car you have, how much you owe on your car loan, and your credit score.
FAQs
1. Is Gap Insurance Worth It?
Gap insurance is worth it for those who have financed their car and have a loan or lease. It can help you avoid being upside-down on your loan in the event of a total loss or theft. It can also be useful if you have little money down on your car or have a low credit score.
2. What Does Gap Insurance Cover?
Gap insurance covers the difference between the actual cash value of your car and the amount you owe on your car loan in the event that your car is totaled or stolen. It does not cover repairs or medical bills.
3. Is Gap Insurance Required By Law?
No, gap insurance is not required by law. It is an optional type of insurance coverage.
4. How Long Does Gap Insurance Last?
Gap insurance lasts for the length of your car loan or lease.
Conclusion
In conclusion, gap coverage is a useful type of optional insurance coverage for those who have financed their car and have a loan or lease. It can help you avoid being stuck with an upside-down loan in the event of a total loss or theft. However, it’s important to consider your individual situation and calculate the cost versus benefit of purchasing gap coverage.
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