Gap auto insurance coverage is put in place to pay the difference between the amount you owe on your car and its cash value. Some gap policies will also pay your collision or comprehensive policy deductible.
If your car is totaled as the result of a collision, fire, flooding, falling objects or theft, the insurance company will pay out based on its cash value. You aren’t compensated based on how much you paid for your car or its replacement value.
Since a car depreciates very quickly after purchase, it is possible to owe more on the auto loan or lease than it is worth. If your car is totaled while you are in this situation, you would have to continue making payments on a vehicle you aren’t able to drive anymore.
In a situation where you bought your car outright, you wouldn’t need to buy gap auto insurance coverage. Since there is no outstanding loan or lease, this type of coverage isn’t necessary.
Minimum Auto Insurance Coverage Requirements
Most states have passed legislation requiring that drivers buy a minimum level of auto insurance coverage. Bodily injury and property damage liability coverage is put in place to pay for claims made by the occupants of the other vehicle involved in an accident.
While the state sets minimum levels of coverage which all drivers must have in place to stay legal, drivers can choose to buy a policy which provides a higher level of protection if they wish. It’s a very good idea to do so, since the minimum level of auto insurance coverage is relatively low in most parts of the country.
If the amount of liability coverage in place is not high enough to pay for the damages caused in an accident, the at-fault driver is responsible for paying the difference personally. Rather than run the risk of having to pay for damages following an accident, a much better choice is to buy a policy with a higher limit from the outset.
High Down Payment and Gap Insurance
In a situation where you put down a fairly high down payment on your vehicle and you make your loan payments as agreed, you may not need gap insurance coverage. Depending on the gap insurance company’s policy, you may not have to make a decision about whether to buy this type of insurance at the same time as you take possession of the vehicle.
You should consider buying gap auto insurance coverage within the first 12 months after buying your car. Before making your choice, you should make a point of finding out what the cash value of your car is and the current balance of your outstanding loan.
Based on this information, you can decide whether gap auto insurance coverage would benefit you. Your current auto insurance provider may be able to add it onto your policy or you can get this coverage from a separate auto insurance provider. Getting quotes from different companies will help you find the best rates on gap auto insurance.