Understanding Gap Auto Insurance Coverage: Advantages and Disadvantages

January 27, 2012

Lots of drivers use Gap auto insurance coverage to provide for payouts that will help them get another car if something happens to the ones that they are driving. There are some specific points about gap insurance that consumers can look at to see if this kind of coverage is right for them.

What Is Gap Insurance?

Gap insurance is very aptly named. This kind of insurance policy covers a "cost gap" between what the vehicle is worth on the market, and what a driver or owner has invested in it. In other words, the gap insurance  is some extra coverage for additional value.

Gap insurance can be very handy for those who may owe more on a car than what it is worth. For example, for a car with several years on an existing financing agreement, the total loan amount could be $25,000, but at the time of payout, the damage claim would be something like $17,000. The gap insurance would cover the additional $8,000 and allow the policy holder to get back on the road with a replacement vehicle.

In many cases, gap insurance is mandated by lenders. A lender will force the borrower to take out gap insurance on the vehicle because a wreck is one of the most likely causes for the driver to default on the auto loan. If there is no vehicle anymore, the borrower may not feel like continuing to pay on the loan.

Pros and Cons

With this in mind, here are some of the main pros and cons of carrying gap insurance:

Pros

  • Quick Auto Replacement - Having gap insurance in place helps a driver to know that if the vehicle was totalled, he or she could easily get the total amount of money needed to go back to a lot and get a replacement vehicle. Busy drivers often don't have time to try to find money for a car deal in an emergency, as they may need the vehicle to commute to work each day.
  • Financial Security - As mentioned above, gap insurance provides protection against charge offs and credit liabilities from defaults on auto loans that end badly, in a vehicle collision. Having gap insurance in place facilitates the proper closing out of an auto loan that no longer applies to a working vehicle.

Cons

  • Additional Premium Amounts - Some drivers may ask themselves if they truly need an additional amount of coverage that they have to pay for regardless of what happens on the road. In some cases, they may feel it's unfair for the lender to require this insurance. This is another good argument for buying a vehicle with cash down, to minimize mandatory insurance costs.
  • Hard to Fix Value - In some cases, it may be hard to accurately assess the value of a vehicle to make sure you're getting only the gap insurance you need. Drivers may have to consult with other parties to figure out what amount of gap insurance to get. Insurance companies may also balk at offering the correct gap insurance amount, and the driver will have to convince them to create an equitable gap insurance agreement that will cover what the vehicle owner has invested.

Think about the above for getting gap insurance for additional financial protection on your vehicle.