Automobiles are fantastic for transportation, but they are horrible investments. At no point is that additional clear than when you total your vehicle in an accident. You purchased that shiny new Ford Fusion for $20,000 a couple years ago, but you only got $10,000 from the insurance coverage firm for it. Even worse, you nonetheless owe $13,000 on the vehicle loan.
What is up with that?
Gap insurance coverage could have created up the distinction in this situation, but increasingly there are other solutions offered.
What is Gap Insurance coverage?
At times referred to as “loan/lease gap coverage” or “upside down insurance coverage,” gap insurance coverage is a specialized type of auto insurance coverage developed to do 1 factor and 1 factor only: make up the distinction in what you bought your vehicle for and what the insurance coverage firm pays for it in the occasion it is totaled out in a claim. It really is traditionally sold for a single premium (ordinarily about $300 to $700) by an auto sales guys at signing.
Yes, that auto dealer's finance manager is an insurance coverage agent also. Properly, sort of. He's ordinarily licensed to sell that gap insurance coverage and some thing else named “credit life,” which I will not get into right here.
Understanding the Terminology Behind Gap Insurance coverage
To greater have an understanding of how gap insurance coverage operates, you must 1st have an understanding of some simple insurance coverage terminology. Auto insurance coverage is developed to repair or replace losses incurred to your car in such a manner that you neither profit nor shed from the deal. This thought is named indemnification. Certainly indemnification is arguably the single most significant notion behind all insurance coverage, not just auto insurance coverage. As an instance, a key insurance coverage firm not too long ago alluded to indemnification by applying the slogan “gets you back to exactly where you belong.”
If it have been all about indemnification then insurance coverage would be uncomplicated. Of course it is not. There are other aspects to contemplate as effectively. For instance, insurers have to have to know what brought on brought on your loss. This is recognized in the business as the “peril.” Examples of perils frequent in vehicle insurance coverage incorporate vandalism, theft, and auto glass harm due to “missiles”i.e. rocks).
Now remain with me right here.
Some perils are particularly not covered by auto insurance coverage. These are named exclusions. Frequent exclusions in auto insurance coverage policies incorporate intentional harm and depreciation. By definition, exclusions are particularly listed in your auto insurance coverage policy.
So here's exactly where gap insurance coverage comes into play. Absolutely everyone knows automobile values depreciate more than time. Depreciation is a peril for the reason that it causes a tangible loss to your car. Nevertheless, for the reason that depreciation is an exclusion in your policy, it is not covered by your auto insurance coverage. Thus this is the rationale for the existence of gap insurance coverage. Stick with us and you are going to pass the insurance coverage licensing exam in any state in the nation.
Do You Actually Will need Gap Insurance coverage?
Quite a few men and women skip gap insurance coverage for the reason that frankly they assume it is just a different boondoggle the auto dealerships use to line their pockets. That is not necessarily correct, even so it is also not necessarily correct that you often have to have it. What is necessarily correct is that you want speak to your insurance coverage agent ahead of you sign closing documents on a new vehicle.
Possibilities are you happen to be going to finance that new vehicle you just bought anyway, which implies you happen to be going to carry complete coverage on the car. You are going to do it if for no other cause than the bank will make you. Failing to do so will compel them to “force spot” complete coverage insurance coverage on your car. You never want to do that.
You do, even so, want to see if your complete coverage auto insurance coverage contains gap insurance coverage coverage as either an solution or as a normal function. Quite a few firms provide this. In addition, an rising quantity of firms provide solutions that permit you to replace a totaled car with a new 1 inside a specific time period.
Despite the fact that the depreciation exclusion nonetheless exists on auto insurance coverage policies, insurance coverage firms are nonetheless sensitive to these issues, not to mention eager to retain your company by providing additional bells and whistles.
Nevertheless, if your auto insurance coverage does not provide any of these characteristics, then you are going to want to do 1 of two factors, get a different auto insurance coverage firm or go ahead and take the gap insurance coverage. The only factor worse than becoming upside down in a car is becoming upside down in a wrecked 1.