We all know that we need to have car insurance and often believe that a standard comprehensive coverage plan is more than enough. We can set up a plan on our cars, amend it to suit our circumstances and know that we have that financial safety blanket if there is an accident. However, simple plans and collision insurance aren’t always enough for all drivers. Depending on your financial situation and the value of your car, you might end up with the short end of the deal.
Car insurance coverage isn’t guaranteed to cover the whole cost of a claim
There is a risk in the world of car insurance that some car owners may not be aware of when they first buy or lease a car. Car insurance providers are required to pay out an amount of your claim for an accident. This is the safety net that we all rely on in case we are ever unfortunate enough to need assistance paying for repairs to a car. But, we can’t assume that this financial figure will always stay the same.
The problem we sometimes overlook at that these companies only have to make payments relative to the value of your car. This means the value of your car at the time of the incident, not when you first bought it. Like all vehicles, your car will have depreciated in value substantially over the years. This could be accelerated by any previous damage or faults that haven’t been rectified. In fact, cars typically depreciate by 20% in their first year alone. Even those car owners that have done nothing but take could car of their vehicle will see the value decrease because of the age of the car.
What Is Gap Insurance and How Can It Help?
What this means is that the payout from your car insurance provider now will be less than it once was. This decreasing value becomes a bigger and bigger risk as time goes on. If you have an accident in a 10-year-old car with a few flaws that now requires a significant sum of money to fix, you may find that your insurance only covers a small percentage. This leaves motorists with a problem. Where do they find the remaining money to pay for the costs of the repairs?
So, what is gap insurance coverage? The name gap actually has two meanings here. The first is the actual name behind the acronym. Guaranteed auto protection. This simply means a guaranteed sum to cover the difference between the money owed on the car and its value at the time. It is also commonly known as gap insurance because of the way that it fills that financial gap between the two figures.
Gap insurance plans work best for those with car loans or car leases
Gap insurance is a great tool for all those on low incomes and long term leases. But, there are pros and cons. If you can sign a good deal at the start of a lease, you can get this protection and cover yourself more easily in the future. It doesn’t cost too much more per month and will help you avoid financial disaster in cases of major accidents, theft and loss. But, there are clauses and issues for those that try and add the product to an existing plan.
Gap insurance for people with a car lease:
This is the main demographic here. Gap plans can help drivers that don’t own their car outright and still owe money on a lease. The lease means that motorists have a series of monthly payments to lease the car. Drivers then promise to return the car in good condition at a specified time or to buy it outright. It is a brilliant system for those that need a car in their lives but remains on a low income. There is also the chance to spread the payments out over a very long time.
This is when the need for gap insurance really hits home. By the third year, you may still owe a lot of money but the value of the car is much lower. An accident here can be crippling financially if drivers can’t cover that gap between the value of the car and the remainder of the lease.
Gap insurance for people with a car loan:
This is another situation with motorists stretching out payments over long periods. Again, it could be a long time where drivers owe money and the car continues to depreciate. It is also important to remember that the risk of accidents and other incidents increases the longer the loan repayment period. Add on another year for smaller repayments and that’s another year of avoiding damage on the road.
The benefits of getting gap insurance on your car lease
The benefits are straightforward:
- Better financial protection for vulnerable drivers
- Compensation on a range of situations
Protection for vulnerable drivers:
There is an obvious financial benefit here for those that are on low incomes and need this sort of long-term lease. It is important to consider how much you would have to pay to your dealership if the car was totaled, lost or stolen before it was paid off. Think about your current situation with your car. How much do you have left to pay on your car loan or lease? If you’re on a long-term deal then it might be a lot. Now think about the likely valuation of the car based on its age and condition. If you were to have a major accident tomorrow, and the car was written off, how would you cope financially? If your insurance provider only paid off the value of the car, could you pay the shortfall yourself
Protection for theft:
One of the additional benefits in getting this gap insurance is that you can use it to fill that void on claims for accidents, repairs, theft and loss. Many providers will talk about gap insurance as a way to pay for a totalled car. This implies that you need to completely write the car off to get any financial help. This isn’t the case at all. You can claim towards major repairs but also for the loss of the car – either through theft or your own fault.
The downsides involved in gap insurance protection
Unfortunately, getting gap insurance isn’t all that easy and there are some other drawbacks to consider:
- Providers have some restrictions in place
- Monthly costs will increase
Restrictions outside of dealerships
The biggest problem for motorists is that car insurance providers have some pretty bold restrictions on who gets coverage. Many insurers require motorists to purchase this gap insurance at the time of buying the car. This helps to ensure that you are the original owner or leaseholder. If you are not the original owner of your current car and would like gap protection, this can complicate matters. Some providers won’t add this insurance if the car is already three years old or more. This is why it is so important to talk to dealerships about this gap insurance plan when creating a lease.
The dealerships may be more flexible and keen to offer a gap plan as you discuss your new lease. However, be aware that they often do so at higher rates than car insurance providers. If you can find a company that will offer a plan after you sign a lease, this could be a cost-effective solution. Remember that plans and perks will vary between providers.
Increased monthly costs
It does cost more, in the long run, to add this to your current car insurance plan. The average is around 5% of the typical costs of the collision and comprehensive coverage. This isn’t that much when you consider the size of the safety net provided. The problem here depends on your current budget. Yet, you should try to look at the bigger picture and long-term protection.
Should you look into getting gap insurance for your car?
It might be too late to get a good gap plan for your car insurance if you have had the vehicle for a long time. But, that doesn’t mean that it is impossible. Some car insurance companies will offer a deal even if the lease isn’t new. So, take the time to shop around and see what providers can offer. It is better to ask and come away disappointed than to not ask at all and miss out. This gap coverage really can make a big difference after accidents, loss, and theft.
If you are a driver looking for a new car and browsing lease and loan options, make sure to add this gap coverage to your plan. It might increase your monthly costs but it is worth it for the protection offered. That car will depreciate before you know it. The last thing you want is to have a large bill in 4 years that your insurance company won’t pay. Make sure that you can fill that gap with gap insurance.
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