Buying a new car is undoubtedly exciting, but before you can get out there and enjoy yourself with peace of mind, there are still a few insurance details that are worth mulling over — in particular, gap insurance.
Whether you've already bought your new car or you're just considering it, you're going to need to know some of the basics of gap insurance — like its various types and the kind of situations in which it might be worth investing.
So, continue reading as we'll be taking a closer look at what gap insurance actually is and if it's even worth purchasing in the first place.
How Does Gap Insurance Work?
Kicking things off, let's cover some of the basics regarding gap insurance, which is also commonly referred to as guaranteed asset protection insurance.
In simple terms, it's essentially just a form of coverage that you'd purchase for your vehicle in case it's somehow written off or stolen so that you'd be fully protected against any kind of financial losses that might arise.
Naturally, there's probably a good chance that you already have some sort of motor insurance already, but those aforementioned examples, you totalled your car, or it was robbed, are normally substantially more expensive to cover than a simple scratch on your paint.
So, if this sort of thing were to happen to you and your car were irreparably ruined, your motor insurer would typically only reimburse you for the vehicle's current market value, which might be significantly less than what you originally paid for it.
As such, there's a possibility that the amount you'd receive from your motor insurance won't actually be enough in order to compensate for the cost of replacing your vehicle, so the main idea here is that you'd leverage your gap insurance to ensure you're not having to dip into your personal funds to pay for it.
Types of Gap Insurance Policies
You'll usually see gap insurance applied in a few different forms to match whatever the circumstance is, so let's look at the three primary types:
Finance Gap Insurance
This first type of gap insurance that we’ll be looking at is mainly designed for anyone who's recently taken out some kind of a finance agreement in order to purchase their vehicle — primarily just to cover the difference between the outstanding finance amount and whatever the motor insurance payout is.
Invoice Gap Insurance
Next, invoice gap insurance pays the difference between the amount you paid for your vehicle (which is usually just the invoice price) and the motor insurance payout, making it particularly useful if you bought your car brand new and you know that its value is probably going to depreciate fairly rapidly.
Lease Gap Insurance
Finally, if you're planning on leasing your car rather than just buying it outright, you can use lease gap insurance to cover the shortfall between the motor insurance payout and however much cash you need to sort out your lease agreement.
When Should You Buy Gap Insurance?
So, now that you've got a better understanding of the sort of things gap insurance covers let's walk through some of the main scenarios where it would come in handy:
New Car Purchases
It's not exactly a secret that cars depreciate in value quickly — no more so than within the first few years of actually owning it — and this immediately makes you more exposed to the overall risk of owing more on the vehicle than it's worth.
Fortunately, though, invoice gap insurance would be ideal here, as you'd be protected against any kinds of fines or other financial repercussions since the difference between the amount you've paid for the car and its depreciated value has been covered.
It's an essential safeguard for protecting your investment and ensuring that you're not left with a significant shortfall in the event of a total loss.
High Depreciation Vehicles
Following on from this theme on depreciation, you might have noticed that some vehicles tend to be notorious for depreciating faster than others — whether it's down to things like the brand, market demand, or even just sudden improvements in the tech that's available.
In general, it's often certain luxury cars and models that have the worst history of depreciating quickly due to reliability issues, so negative equity gap insurance can definitely provide some peace of mind here since you won't have to worry about negative equity if your car is stolen or written off (because the gap has been bridged between the motor insurance payout and the outstanding finance balance).
Long-Term Finance Agreements
Lengthy finance agreements with lower monthly payments are obviously a pretty solid option at first glance, but it does, however, expose you to the risk of being “upside down” on your car loan — basically meaning that you owe more on the vehicle than what it's currently even worth.
Now, these kinds of situations usually come about if the vehicle that you've been using somehow depreciates faster than you're paying down on the loan balance, and if you don't have gap insurance, you can expect to pay a pretty substantial amount of money if your car ends up being declared as a total loss.
Leased Vehicles
Finally, in general, there are probably a few different situations where leasing your car might actually come with certain advantages over just outright buying one — namely, when you're looking for lower monthly payments or even simply the ability to drive a new car every few years.
Unfortunately, though, leasing certainly isn't without its own set of financial risks, particularly when it comes to insurance coverage since you're more often than not the one who's responsible for taking care of insurance coverage, so the lessor's interest in the vehicle is protected.
As such, if, via some nightmare scenario, the car that you've leased has been stolen or even just totalled, there's a good chance that your motor insurance payout won't be enough to fully cover the outstanding lease balance — naturally leaving you liable for the shortfall.
So, lease gap insurance can be used here in similar ways to the other examples, as you're covering the difference between your insurance payout and the amount to settle the lease — making it a no-brainer for anyone looking to lease a vehicle who wants protection against unexpected financial shocks.
Related Guides:
