The Basics of Gap Insurance and why it is Necessary

Most people have heard of gap insurance in passing yet the majority are not quite certain as to what it actually is and why it is important.  Gap insurance is a form of automobile insurance.  This coverage is triggered if the insured vehicle is accidentally totaled.  Gap insurance is completely optional.  If this coverage is acquired, it covers the difference between the totaled automobile’s actual cash value and the amount still owed on the loan or lease.

The money provided through gap insurance often proves critically important as the majority of people owe money on their vehicle.  Plenty of people owe more on their automobile than it is actually worth after depreciation and wear and tear are accounted for.  Gap insurance is essential in such a situation as this coverage makes it that much easier to pay the difference between what is owed and the vehicle’s actual value.  However, if the vehicle is completely paid off and there are no outstanding loans, gap insurance is unnecessary.

Actual Cash Value

In the context of auto insurance, actual cash value is a term used to refer to the automobile’s cash value in the event it is totaled.  This means the insurance provider pays the value of the vehicle according to the market at the point in time when the accident occurred.  Actual cash value, sometimes shortened to ACV, equals the vehicle’s cost when it was new with depreciation subtracted to account for age, mileage and wear and tear.

If the vehicle’s actual cash value is less than what is still owed, the insured driver simply receives the actual cash value.  The driver still has to make payments above the actual cash value amount paid by the insurer.  However, the comparably small premium paid for gap insurance goes a long way in reducing the aggregate financial loss of this unfortunate event.

A Look at Gap Insurance in Action

Let’s take a look at an example of gap insurance to show just how useful it is.  Consider an individual who purchases a new automobile for $30,000.  He takes out a loan that lasts five years.  After the first year, he owes $24,000 on the loan.  The car is subsequently totaled in an accident.  The vehicle is worth a mere $21,000 at market rate.  The average car insurance policy pays the automobile’s actual cash value of $21,000 even though the owner owes $24,000 on the loan.  If such a driver had gap insurance, the coverage would account for the money still owed on the vehicle so he would not have to account for the money on his own.

Some Auto Loan Lenders Mandate Gap Coverage

Some lenders force those taking out auto loans to obtain gap insurance.  Such a requirement is common when financiers provide auto loans for leases.  The coverage is essential from the lender’s perspective as it guarantees they will be paid the money owed on the lease or loan.  It does not matter if the car’s actual cash value is less than the loan balance.  Furthermore, the coverage protects drivers as there is no longer money owed on a vehicle they can no longer use.  So be sure to take a close look at your lease agreement or loan to determine if gap coverage is required.

Certain auto policies automatically have gap insurance included in the coverage.  If gap insurance is not a component of your coverage, you can likely add it for a small premium.  Keep in mind some auto dealerships will tack on gap insurance to the cost of the vehicle loan.  So be sure to check out the cost of this insurance through your auto insurer prior to making a commitment. If you find yourself in a situation where you are unsure of your rights or are being told that you are liable for something, be sure to contact Richard Schibell, an experienced auto accident attorney. We have three offices conveniently located in New Jersey to better serve you!

 

 

The post The Basics of Gap Insurance and why it is Necessary appeared first on Richard D Schibell.

source http://richardschibell.com/basics-gap-insurance-necessary/