If your insured car gets damaged in an accident or is stolen, then usually the amount received from insurance company is lesser than what you had actually paid for it. This is because the car’s value depreciates over time. Thus the settlement amount is actually less than what you still owe on account of your car loan. Gap coverage helps one to come out of this kind of situation. Gap Insurance is the difference between actual value of the vehicle and the balance still owed on the financing.
How Does Gap Insurance Work after a Car is Totaled
This is mainly done for low down payment loans, high interest rate loans or ones with 60 month or longer terms. Almost all the auto insurance companies provide these and are usually offered at the time of purchase. These are mainly used for new and used small vehicles and heavy trucks.
Gap insurance helps one to pay the difference between the balance of a loan and what the insurance company pays as compensation if the car is considered a covered total loss. This is an optional insurance coverage. Actual Cash Value (ACV) is the cost of the car when it was new. Depreciation due to usage, physical condition and other factors are deducted from ACV.
The best way to buy is through online brokers and insurers as they offer the best rates. It is better it do a little research work. Thus different sites can be checked to get the best possible rate. If one is going by a broker then lots of information and advice related to the policy can be gained. Another way to get these covers is to approach the specialist gap insurers. But this should be done only after one has checked the rates of the online brokers to ensure that the insurers are providing competitive rates.
Whether one need it or not depends on various factors. In case the insured person’s car is stolen or damaged in an accident and he/ she is perfectly happy with a replacement car and has no need of buying a brand new better car, then the settlement amount received will be enough. The sole benefit of the gap in this case will be he/she will get back the original amount that was paid. Again, if the car in question is new and is covered under fully comprehensive car insurance, which offers for new replacement during the first 12 months for new cars then there’s no need of gap coverage.
If the person has bought a used car, then gap insurance will not be very useful. This is because used car will not depreciate in the same rate as the new one. On an average fall in value of a new car is 60% in first three years, which is much higher than a three year old car’s depreciation rate. So for used cars, the gap between what had been paid at the time of purchase and what the insurer pays in case of an accident or theft is very small. So the Gap policy will be more or less useless.