Posts Tagged ‘gap insurance’
As I was signing the agreement to lease my new car, the sales manager at the car dealership offered me to purchase Car Gap Insurance. I was surprised (if not indignant) – paying for a full coverage auto insurance already cost me an arm and a leg, but apparently some supplemental insurance policy was being imposed on me. Basically gap insurance for cars covers the difference between what the car is worth and what the insurance company would pay for it in case it is stolen or damaged beyond repair. Let’s say you leased a brand new car for 36 months, however in 6 months it gets stolen. The auto insurance carrier may determine that the car is worth less than you still owe for it with all your scheduled payments. The difference or the “gap” between what the auto insurance will pay and what you owe on the car can be a few thousand dollars (it’s higher if you didn’t make a down payment or if you own a car that depreciates quickly). For example, if the bank expects to receive $19,500 for the stolen car, and the auto insurance will only pay $17,500 – you will have to cover $2,000 out of pocket. If you purchased the gap insurance, you don’t need to worry about the difference.
Gap insurance cost is comparatively low (I was quoted $19 a month or $228 a year), however because the likelihood of needing it is so small and the gap it’s meant to cover is not usually significant, most car owners prefer to skip buying it. However if you are leasing a car, buying gap insurance may be in your lease contract, since you will be making lower payments and will owe more than the car is worth for a substantial amount of time.