GAP insurance normally applies to cases of auto accidents that lead to total losses of the vehicles. It provides coverage for the difference between what the insured person will receive from the auto insurance company and the remaining balance of the loan owed to the lienholder (bank providing the loan) on that automobile.
It should be stressed, first, that GAP coverage is not part of any state laws. In almost all states including automotive insurance is the law. The State mandates to have car insurance at state limits which is $20,000 bodily injury per person, $40,000 bodily injury per accident, and $15,000 property damage per accident. You are not obligated under any law to purchase or have GAP insurance. A number of lienholders prefer to see you having this type of coverage when there is a broad gap between what the insured person owes to the bank and what the auto insurance company may pay in the event of total loss. Lienholders will worry less when they know that their loan will be paid off when the insurance company pays less what you owe to them.Examples of GAP, and where the GAP insurance is most needed:
1. You purchase a brand new vehicle at $40,000 and the dealer let you go without making any down payments because of your perfect credit score. Nine months later your vehicle get stolen, and you are left with a $36,620 loan. Your insurance company argues that the fair market value of your vehicle (they can get you same one) is 30,600. In this case, $6,020. Your GAP insurance, if you have it, will cover that amount.2. You decide to purchase a used SUV and the best offer you negotiated was $19,500. You knew that you paid $4,000 extra because the truck is equipped with brand name DVD player, TVs, sound system, and very lovely rims (neither is part of the insurable value of the truck with the auto insurance company.) Because of your low credit score the lienholder charged you an APR of 25% on the loan. You made only $3,500 down, hence leaving you with a loan of $16,000. After a full year of making payments you got into a car accident and your SUV was a total loss. You insurance company decides that the value of the high mileage truck with all the not-insured extras was only $7,500. After making payments for a year, your balance is still $13,500. In this case we have a gap of $6,000 that would be paid by the GAP insurance, assuming that you purchased the coverage.
Who needs GAP coverage? Normally people who over paid (over charged) for an auto, or people who made small or no down payments are the people who will have some sort of GAP, therefore, they need the coverage. Also people who buy high mileage autos or hackneyed, over used, autos, at a price that was too close to the Actual Cash Value of the vehicle will also have a gap issue. Some insurance companies will underpay total loss claims for overused vehicles, salvaged vehicles, or autos with prior extensive damage. Also, if your loan has very high APR chances are higher that you are paying off your loan note at a very slow pace, at the same time your car is steadily depreciating, leaving you with a even wider gap. One more group of people who need it are those who cannot pay for the gap in the event of future total damage.Used and new car dealers may suggest that you obtain GAP insurance through them. Keep in mind that GAP insurance is not compulsory, but it's fine to have if you really need it. Nevertheless, before you get your GAP coverage at the finance manager desk of the car dealership you need, first, to get some idea if you need the coverage or not. Contact your insurance broker and see what's the worth of the auto you are purchasing in the books. You can also use Kelly Blue Book to decide the worth of the car. Accordingly, and based on the sum of loan note you are borrowing you may be able to tell the approximate amount of gap that may exist, if there is any gap.
GAP insurance coverage is a single premium policy that is sold for the life of the loan. The price runs from $250 to $600 for the life of the loan. Most GAP policies can be canceled within specific number of months, and you may (or may not) get some refund, after paying all administrative cost and commission, assuming that you remember to cancel, and you know how to do it; in the event you sell your car or payoff the loan prematurely.For people who purchase a brand new luxury auto with no down payment and with a potential gap of $20,000, it may be worth it to pay $700 for gap insurance coverage. But for other people who purchases a $6,000 used car with a potential GAP of $1,200 it will not make any sense to spend $350 to get GAP insurance. If you make a decision to get GAP insurance, try to get some quotes before you sign on for that coverage at the car dealership. There are lots of websites that will offer you with a competitive price for GAP insurance coverage.