Gap Insurance

What is Gap Insurance?

When you purchase a brand-new vehicle, its value starts to depreciate as soon as the vehicle leaves the automobile showroom. According to the research, a majority of four-wheelers lose approx 20% of their total value in a year. The insurance policy will cover this depreciated value.

Gap insurance meaning is special coverage that pays you the difference between the amount you got from the standard insurance and the amount you actually owe to the car financing company. This is especially useful in the event of accidents, in which, your vehicle is damaged to a point that the standard insurance will not suffice. Here’s when you need to purchase gap insurance for your vehicle.

When do you Need Gap Insurance?

Invested in a Car with Low Resale Value

If you have invested in a vehicle that depreciates faster than usual, then you are going to pay a higher down payment. One of the reasons why your car’s value depreciates quickly is the extensive use of the vehicle. The more miles your car covers, the faster its value will depreciate.

You could not Pay at least 20% of the Down Payment

If you pay lesser than 20% as the down payment or make no down payment at all, then you will need gap insurance. The lesser the amount you pay as a down payment, the messier your auto loan will get. Next thing you know, you have to repay the balance with extremely high interest.

Leased a Car

If you Lease a vehicle, you are supposed to pay a specific amount to the lessor every month until your vehicle lease agreement terminates and you no longer need the vehicle. However, if your car gets stolen or damaged during the lease period, then you will be in great trouble. You will owe the Book Value of the car to the lessor.

Understanding Gap Insurance

Simply put, gap insurance is a way to protect yourself from the losses you incur from the car damages, which the standard insurance policy fails to cover fully. Perhaps, you owe a higher lease amount that what you receive from the vehicle insurance. That’s when the gap insurance policy helps. In other words, it is a situation when the amount you owe on the vehicle exceeds the book value of the vehicle.

Let's say you own a vehicle that's worth Rs. 10 lakhs. Now, you have not paid Rs. 5 lakhs to the vehicle owner yet. If your car gets damaged due to an accident or its value simply depreciates at a rapid pace, it will be written off. You will get a total of Rs. 10 lakhs from your insurance company as compensation for your loss. However, the total amount you owe to the car financing company is Rs. 5 lakhs. The amount you get from the insurance will not suffice here. You are going to need an extra Rs. 20,000 to cover the loss fully. If you have purchased the gap insurance, then the balance amount will be covered by this policy.