Auto Insurance

Buying a new auto is an exciting time but arranging the insurance is a less than thrilling part of the new purchase. However, when you pick your car up from the showroom, the dealer may ask you whether you want to include gap insurance in the finance package, an option that many people may not have considered.

Gap insurance is designed to cover the difference in cost between how much is outstanding on any loan or finance and the amount the insurance will pay out if the car is totaled. While many people tell their insurer how much they paid for their car when they bought it, not everyone realizes this is not the payout you are likely to get if the worst happens, even taking the deductible into account.

An insurer will only pay out what they believe is the market value of the car, in the condition the car was in prior to the accident. For those that purchase a new car whose tires have never touched the freeway, this means that the minute they drive it away, the value nosedives by several thousand immediately.

Unfortunately, while the market value of the car may plummet, the balance outstanding on finance is unaffected meaning that many people are driving around in a vehicle that is worth less than what they are paying off.

This is not as bad as it sounds because after a period of time, the depreciation in value levels off and the finance repayments catch up until eventually the auto is worth more than the outstanding balance.

However, until this time, if an accident occurs most people will be in a sticky situation financially as they will be obliged to continue making finance payments on a car that no longer exists, to cover the shortfall in the insurance value.

This is why gap insurance is taken out by many people. This type of coverage pays the difference between the insurance payout and the outstanding balance, providing peace of mind that even if the worst happens to the vehicle, there will be no ongoing financial commitment. While this may sound like a good type of coverage to get, it is not always a good idea or may not be on offer.

Any individual putting a large deposit down when purchasing their vehicle may find there is little difference between the outstanding finance balance and insurance payout and with the price of gap insurance, would be better off saving the money. Also, motorists who buy older vehicles will find that their insurance coverage may more or less match the finance balance, again negating the need for gap insurance.

Insurers that offer gap coverage tend to place a limit on the age of the vehicle with many not willing to consider a car older than eight years, even if it is a premium luxury vehicle and high in value. There is also a maximum length of contract, which varies between carriers, so for anyone purchasing a vehicle on a long-term plan, it may be necessary to search the market to get coverage.

If you decide gap coverage is cost-effective for your new purchase, buying it from the car salesroom can be the more expensive route. Gap insurance is widely available from a number of providers and does not have to be purchased at the point of sale; you have 12 months to obtain coverage.

Comparison sites such as MoneySupermarket.com can be a great help in tracking down a discount or finding the cheapest premium available, as well as providing a guide to the benefits the policy offers.