GAP insurance coverage – Simple Explanation of GAP Coverage Option

Not everyone can afford to buy a brand new car outright. Therefore, many people resort to some form of personal finance such as loans to fund their purchase. In order to keep payments low, many auto insurance companies or banks offer long term payment of up to six year for brand new cars.

As the price of new cars depreciate or decrease very quickly, buyers of brand new vehicle can expect a significant drop of their car value of few thousand dollars before it’s parked in their drive way. If you purchase a car worth $30,000 and keep it for around a week, your car value may drop right down to a market value of $25,000. In the event of an accident, your insurance policy will only pay out the market price of the car. In our example, it will be $25,000. This creates a scenario where you will be liable for the remaining $5,000 to pay to your garage for a car you no longer have.

This is where GAP coverage option helps. If it’s included in your policy, it will cover the additional depreciation costs which is not included by default in most insurance policies. Going back again to our example above with a GAP insurance coverage, the insurance company will pay out $25,000 plus an additional “gap” of $5,000 made available through the GAP coverage option.

Most insurance companies will strongly recommending having this option for new cars, but some car garages will require it before selling the car to insure it’s paid off by GAP insurance in case it’s totaled following an accident.

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