What is Gap Insurance and What Does it Cover?
Anybody who owns a vehicle understands that they have to have insurance before they can legally drive it on the roadways of Illinois and throughout the US. When most people think of vehicle insurance, they think of personal injury liability and property damage liability. Perhaps uninsured or underinsured motorist coverage comes to mind. However, many people are also required to have “guaranteed asset protection” or GAP insurance policies on their vehicles. Here, we want to look at what GAP insurance is and what it can do to help if you are involved in an accident.
Explaining Gap Insurance for Vehicles
Not everybody has to have GAP insurance. However, this type of insurance is incredibly important for many people throughout Illinois. If a person is leasing or financing a new car, most lenders will require them to have collision and comprehensive insurance as part of their vehicle insurance policy until their car is paid off. GAP insurance is meant to be used in conjunction with these other coverages.
In the event you have a claim that is covered by your insurance carrier, collision and comprehensive coverage is designed to pay for a totaled or stolen vehicle, but only up to its depreciated value. This can be a problem when it comes to new vehicles that have recently been driven off the lot. New vehicles depreciate almost immediately.
The problem comes in when the depreciated value for a vehicle is less than what a person actually owes for the vehicle. That is where GAP insurance is important.
How Does GAP Insurance Work?
Gap insurance is designed to kick in if you are “underwater” with your auto loan when an accident occurs. This means that you owe more than the car is worth.
In order to properly explain how GAP insurance works, we should look at a brief theoretical scenario: Suppose you buy a brand new vehicle for $30,000. However, what happens if you still owe $25,000 on your vehicle loan when the car is totaled in a collision covered by your insurance?
In this scenario, collision coverage would pay the lender an amount up to the totaled car’s depreciated value. Suppose the car is currently worth $23,000. If you do not have GAP Insurance, this means that you would be on the line for an additional $2,000 out of your own pocket to settle the auto insurance loan for the totaled car (the difference between how much you owe and what the car is worth).
If you have GAP insurance, the insurance carrier will pay this additional $2,000 for you so that you do not come out losing any money in the scenario.
Can You get GAP Insurance From Someone Other Than the Dealer?
It may be possible for you to get GAP insurance after you buy a new car, but this will depend on the model year of the vehicle. Often, dealers may make you think that you have to have GAP Insurance before you drive it off the lot, but this is a tactic designed to get you to buy GAP Insurance through the dealership. Buying this type of insurance directly from an insurance carrier is typically going to cost less than buying it from the car dealership.