Gap Insurance: Protecting Your Investment

Leasing or financing a new vehicle is an exciting endeavor for any individual. There's nothing worse than being without wheels, and owning your own car can make life much easier for running errands, going to work and visiting friends. Although the bank might still own a major portion of the car - in fact, you might not "own" so much as the tires - you've still got transportation, and that's what counts.

Most financial institutions require that you purchase full insurance coverage for your vehicle - at least for the first six months of financing. What they don't require is gap insurance; in fact, you might not even know what gap insurance is. But if you think that a standard insurance policy will cover you for any possible accident, then you might find yourself in a sticky situation.

Gap insurance is very much what the name implies. When you finance a new vehicle, the value of the car depreciates as soon as you drive it off the lot, and continues to decrease in value at an astranomical rate. You can't do anything to avoid the depreciation of your car, but you can do something to ensure that it doesn't leave you swamped in debt.

Let's say that you purchase a $20,000 car for a 60-month lease. That means that you'll be paying off the car - and the accrued interest - for the next five years. You buy an insurance policy for the car, which covers liability, collision and uninsured motorists. You feel safe and comfortable in your new purchase.

But let's say that three months into the lease, your car is stolen from a parking lot. You leave the mall only to find that your transportation home has been removed from the premesis. You call the police, file a report, and hope that your car will be found, but it isn't. You call your insurance company, file a claim, and find that they are only willing to pay for the value of the car at the time it was stolen, which is only $15,000. Unfortunately, the financial institution that gave you an automobile loan is going to want you to pay everything you owe on the car, which totals $22,000 with interest.

Unless you have seven thousand dollars stashed away under your mattress, you're in a heap of trouble. You'll have to live in a studio apartment with no electricity and - gasp! - no cable until you can pay it off. But if you had gap insurance, there wouldn't be a problem

Gap insurance covers the "gap" between the amount owed to your financial institution and the amount payable by your insurance company.

Some lease companies include gap coverage in their contract, which is a money-saver for you. When you're shopping around for cars, read the lease agreements carefully to find out of gap coverage is included or if it is mandated by the financial institution. In some cases, you are required to obtain coverage from your insurance company, but even if you aren't, it's a good idea to check into it. It can save you a heap of money in the long run, and can keep you watching cable channels for the entire duration of your lease.

In the terms and conditions for your normal insurance policy, you will see a clause that reads something like this:

"In the event of a total loss, the policy holder will receive the actual cash value of the vehicle, minus any deductible"

The key words in this phrase are actual cash value. A gap insurance policy works like a "rider" on your home owners' insurance policy or other types of insurance. For example, if you have expensive antiques in your home, you might pay an extra $5.00 per month to insure the antiques in the event of fire or theft. A gap insurance policy works the same way.

The only time when a gap insurance policy might not be needed is if you put a large amount of money down on your vehicle. For example, if you put 50% down, you probably won't need gap insurance until you are almost through with your payments. Most insurance companies allow you to purchase gap insurance at any point during your lease term, so you can buy a gap insurance policy later if you feel it is necessary.

If your insurance company won't cover a gap insurance policy, visit Gap Insurance Loss Protection. They'll insure nearly anyone who is currently leasing a vehicle - regardless of the point you have reached in your lease. Most policies cost less than $5.00 per month, which is a minimal expense for covering your investment.