Gap auto insurance — is it good value for money?

Whenever you buy a new or a high - value secondhand vehicle, both the seller and the insurer you approach are likely to ask you about gap insurance. This is a quick explanation of what gap coverage is and who benefits from it.


What is gap auto insurance?

If you are really unlucky and the insurer decides your vehicle is a total loss after an accident, all you are entitled to recover is the fair market value. This is the cost of a replacement vehicle of the same make and model, and in approximately the same condition. The same rule applies if your car is stolen. You can argue it is economic to repair a damaged vehicle but, if the decision to total it stands, there may be a gap between the dollars you receive as fair value and what you owe on it. Before you buy, always read the small print on a gap policy to see exactly what is covered.


Who should buy gap auto insurance?

If you are renting the vehicle, there may well be terms in the lease requiring you to pay the rental installments for a minimum period of time. If you borrowed money, the interest and any charges added on may be more than the fair value you are offered. It is a sad fact that new vehicles depreciate fast, e.g. you immediately lose any sales tax. If you know you will not be able to pay the difference out of your own pocket, you should think of buy a gap policy.


An example

Let’s say your vehicle runs out of control on an icy road and ends up in a ditch. The insurer finds it will cost more to repair than its actual cash value. In such cases, the insurer totals your vehicle and checks the valuation sites to fix the fair value payment. Let’s say you bought the vehicle three weeks ago for $30,000 and you have not yet made a payment. Have you agreed a deductible? If so, that is taken into account. Suppose the actual cash value is $28,000. Can you afford to pay the difference plus the deductible? If not, there’s a good case for buying gap cover.

Be sure you know what you are buying. Some companies offer a lease or loan pay - off cover. This is not quite the same as gap cover, but it has a similar effect. Always read the terms of the policy before buying!

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