Whether someone found a great Holiday season car deal or they are getting ready for a car dealership’s annual New Year’s sale event, many individuals are considering purchasing a new vehicle this time of year. If you are one of those individuals, or someone who has recently purchased a vehicle, you may want to consider adding gap insurance to your new vehicle’s insurance policy.
What Is The “Gap?”
If you have collision coverage in your auto insurance policy and your vehicle is involved in an accident and is deemed a “total loss,” your insurer is only required to pay up to the fair market value (also referred to as the “actual cash value”) of your vehicle.
Unfortunately, the fair market value is frequently not the value you paid for the vehicle, but rather is a lower value determined by the vehicle’s condition prior to the accident. Thus, if you have an auto loan that exceeds the fair market value, you will remain liable for the “gap” between the loan amount and the fair market value. That could leave you with no vehicle and a hefty bill to pay.
For example, let’s say you purchase a new vehicle using lender financing and the loan amount on the vehicle is $30,000. If that vehicle is involved in an accident a few days later, its fair market value may only be $25,000 because of the depreciation in value after a new vehicle is “driven off the lot.” Under collision coverage, the auto insurer should pay the $25,000, but you are still liable for the remaining $5,000 on the auto loan. This is where gap insurance comes into play.
How Gap Insurance Helps
If the individual has gap insurance, the $5,000 “gap” between the loan amount and the fair market value will be covered, and paid off, by the gap insurance. However, without proper coverage, the gap that the individual must pay between the loan amount and the vehicle’s fair market value can be substantial.
Most large auto insurers offer gap insurance as an optional insurance coverage that can be added to your vehicle’s insurance policy. Some lenders may include gap insurance in the cost you pay for the vehicle. You should always check the paperwork, ask the salesman, and confirm with your insurance company, prior to purchasing the vehicle if you desire to have gap insurance coverage.
Other issues may arise which can affect the amount paid by gap insurance such as a deductible, policy limits, and the facts surrounding the destruction of the vehicle. If you have been involved in an auto accident through no fault of your own, you should seek an attorney to assist you in protecting your rights.