Auto insurance is a safety measure which provides financial protection in case of an accident. It’s a contract between an individual and the insurance company that protects you against any kind of financial loss caused due to an accident or theft. For people who are probably not aware of the term gap insurance, it literally stands for a type of auto insurance that car owners can buy to protect themselves against the losses that can arise when the amount of compensation received from a total loss does not cover the amount the insured person owes on the vehicle’s financing or lease agreement.
In other words, it’s a gap between the amount the car insurance company owes on the car and the car’s actual cash value (ACV) in the event of an accident. While in case of a lease, gap insurance is much more complicated as here, though you aren’t buying a car, you are responsible for the cost of the car if it gets damaged or stolen.
What is gap insurance and do car buyers really need it?
Reasons why car buyers need it.
- Want to buy a new car
Gap insurance is necessary when you buy a new car. If the new car you are buying is in the lower amount, gap insurance may be worth it.
- If you loaned money to buy a car
In order to buy a new car, if you don’t have enough finance, you can ask for a personal loan. In such a situation, you may find gap insurance useful. Here, the gap insurance loan would be paid off earlier so you wouldn’t be left paying back the money for a car you no longer have or a car you’re not able to drive, for example, you crashed your car and now won’t drive it again.
- Depreciation of the cars with time
One of the reasons why car buyers need gap insurance is because cars lose their value with time. Depreciation of a car depends on lots of things such as the model of car, how old it is, its condition etc. Now, because you’re buying a used car, its value will already be lower. Moreover, the gap it covers between the price you paid and what your insurer will pay out is a lot less, making gap insurance often worthless with a used car.
Gap insurance is important as it ensures that you are able to buy a new car without being subjected to various reasons.