Gap insurance, also known as “guaranteed asset protection” insurance, is a type of coverage that can provide financial protection for car owners in the event of an accident. It is specifically designed for car owners who have recently purchased a new or used car or those who have a car loan with a high-interest rate.
Purpose of gap insurance
The main purpose of gap insurance is to bridge the “gap” between the amount you owe on your car loan and the car’s actual cash value in the event that your car is deemed a total loss. In other words, gap insurance will pay the difference between the actual cash value of your car and the amount you still owe on your car loan.
For example, let’s say you purchased a new car for $30,000 and you still owe $20,000 on your car loan. A year later, you get into a severe accident and your car is deemed a total loss. Your auto insurance policy will typically only pay out the car’s actual cash value, which is now $22,000 due to depreciation. Without gap insurance, you would be responsible for paying the $8,000 difference between the actual cash value of the car and the amount you still owe on the car loan. But with gap insurance, the insurance will cover that difference and you won’t have to worry about it.
Important of gap insurance
It’s important to note that gap insurance is not a required coverage, but it can be added to your auto insurance policy. It is typically a relatively low-cost addition to your policy, and it can provide peace of mind knowing that you’re protected in the event of a total loss.
It is especially beneficial for those who have recently purchased a new car or those who have a car loan with a high interest rate, because new cars depreciate in value quickly, and if you’re in an accident and your car is deemed a total loss, your insurance company may only pay out the car’s actual cash value, which is often less than what you still owe on your car loan.
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Conclusion
When purchasing gap insurance, it is important to read the fine print and understand what is covered by the policy. Not all gap insurance policies are created equal, so it’s important to compare options and choose a policy that best fits your needs.
