The business of insurance can be a confusing business indeed. Knowing what insurance to have for what situation can become overwhelming.
Who needs to purchase gap insurance?
The question of who needs gap insurance is an important one. First, gap insurance should be purchased by people who are leasing or those who know they will owe more than the car is worth. Though a leaser is not purchasing the car they are however responsible if the car is stolen or totaled. Lease monthly payments are usually small making the amount paid into the vehicle and value of the vehicle itself being quite a gap. Someone who has made a significant down payment or is not considered upside down should not buy gap insurance.
What is gap insurance?
Gap insurance is the bridge between what the car is worth and how much is owed on the car. It is only used when the car is totaled in an accident or stolen while the owner is still making payments.
How does gap insurance work?
Let’s say an owner buys a car for $25,000, puts down $500 and pays $ 450 in monthly payments. Then six months after purchasing the car it is totaled in an automobile accident. The collision insurance company determines that after just six months that the car is worth only $ 20,000 and that is what they will pay. The owner has only made six payments totaling $2700 plus the $500 down payment. When the $3200 is taken from the $25,000 then $21,800 is owed leaving a difference of $1800. The gap insurance would pay that difference of $1800. Someone without gap insurance would owe that amount and would be considered upside down, meaning they owe more than it is worth. When someone is considered upside down or have made a low down payment or have rolled over the cost from another trade-in may find it beneficial to purchase gap insurance.
