If you've ever thought about getting insurance for your car to protect against a big accident, you may have wondered about how does gap insurance work. Gap insurance works like this. If you are in an accident that damages your car but you are still underwater with the loan, GAP insurance will cover the difference as determined by your insurance company. Here's how this works.
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Let's say that you are driving along and suddenly rear ends another car. This car is probably worth a lot more than yours, and it also probably has a good amount of damage itself, which you probably do not have much of either. But because it is an older model, it is also probably less well maintained than your own vehicle. When it comes time to pay for the damages, however, you find that you don't really owe much of anything. You could be paying for something that someone else forgot to pay for or did not know how to fix.
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This is where Gap Insurance steps in. It will pay out to the amount of the vehicle that was totaled in the accident, less the amount that you still owe on the car loan. For example, let's assume that your car loan is ten thousand dollars. If you were to get into an accident and it was a total wreck, you would be looking at paying over four thousand dollars. With this in mind, you probably won't see an increase in value for that vehicle, so Gap Insurance would be a smart way to go.
How Does Gap Insurance Work?
Gap Insurance also works in reverse. If you get in a wreck, your coverage kicks in to cover the rest of what you still owe on the vehicle. Your premiums will go down, and your loan balance will be covered up to the point it is paid off. In order to determine the amount of coverage you need, your insurance company will look at the value of your car and your current debt load. This will make the determination for you.
When you are deciding how does gap insurance work, you must also consider any other factors that may affect your premium cost. For instance, if your car has a low market value, you will be required to purchase more collision coverage. If your car is worth much more, you will have to pay less for the collision coverage. These are just a few examples of how the insurer rates your risk, which are then translated into prices for your premiums.
Your car insurance policy will typically have a minimum liability requirement, which is the maximum amount of insurance that your insurer will pay out on a claim. This minimum is usually set by your local state. If your liability limit is not sufficient to pay for a claim, your lender will require you to purchase additional insurance coverage. However, if you are still unable to pay for the additional liability, your car insurance policy will end, and you will not be allowed to purchase another automobile until you have settled your loan. Gap insurance is sold in combination with your automobile loan.
Gap insurance works through your lender. Once you have been made liable for how much you actually owe on your automobile, your lender will send you a letter listing all of the depreciated value you currently owe them. This letter will specify how much your vehicle is worth, as well as how much your payments towards this loan are. The letter will also provide details about how much time you have until your vehicle is total zero.
If your payments are up to date, your dealer will then contact your auto insurance company. With the dealership's permission, your auto insurance company will give you a credit to use in your next monthly payment. Your dealer will then use this credit to pay off the loan that is in arrears. The end result is that you will no longer be responsible for how much your vehicle is worth, and you will be able to afford your new monthly payments.
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