Understanding Gap Insurance - Filling The Gap In Auto Insurance Coverage

What is gap insurance? Well, that's an easy answer, but instead of just saying "Gap insurance is an optional insurance policy that covers difference between the amount you owe and the amount your vehicle is worth in the event of an accident". We'll elaborate. Besides, even if that's the truth (which it is), maybe you want to know more. Like....

When do I need Gap insurance? Is it a scam. Is it mandatory?
Gap insurance is definitely not a scam and sadly, it's not mandatory. How many times have you heard the term "upside down" when someone is referring to their vehicle? You've probably gathered (or at least understood what they meant) that they owe more than the vehicle is worth. In general, that really sucks right? Who wants to buy a brand new vehicle for $50,000, find out in 9 months it's worth $42,000 and they still owe about 49,500? I'm guessing no one. Unfortunately, that's the reality. Fast forward 2 years and it gets worse. We're not going to get into the details of a vehicle loan, but you can guess that when you've roughly paid off $10,000 in 2 years on an automobile loan of for a vehicle that's now worth $42,000 - you're "upside down" on the car right? Yes. Without giving a primer on insurance companies and how they pay out on claims, let's just paraphrase here. An insurance company will pay out market value for a vehicle, and that's determined by you guessed it - Market prices. This is called Actual Cash Value or the "book value" of your vehicle.

If I lease my vehicle, isn't there a set amount I owe and doesn't insurance cover the total value?
This is a typical question asked by those unaware of what a lease is. The #1 way to owe more than your vehicle is worth, is to lease. When you're leasing a vehicle you're essentially renting it for a certain amount of time (36 to 48 months typically) and at the end of the term (lease end) you're asked to turn the car in or pay the balloon payment (the balloon payment is your lease end payoff, which is predetermined based on the cars residual value negotiated at the start of the lease). Take the instances above for traditional financing and then apply it to a leasing situation. The insurance company is only going to pay out what the vehicle is worth in the books, essentially "market value". If the difference between what you own on the vehicle and what the vehicle is worth is $12k, then guesss what? That's $12k is coming out of your pocket!

This is where gap insurance comes in and hopefully you can see now why it's a smart decision to purchase the optional insurance. Any time you're financing a vehicle you run the risk of being "upside down" at any moment based on the market value of the automobile. The last thing you want to deal with if your vehicle is stolen or totalled is finding out you owe the difference. If you own or a lease a vehicle, you owe it to yourself to talk to an insurance agent about gap insurance coverage on your car.