The basics of gap insurance

lose_your_carThe cost of fuel, insurance, taxes and car maintenance are usually considered when buying a vehicle. It is assumed that the payment made for vehicle insurance will free you from all financial liabilities whenever a claim is raised on the insurer. But one very important aspect has been left out that can later make you feel that you have been caught on the wrong foot when you approach the insurer for settlement. Had you considered the aspect of vehicle depreciation when taking up vehicle insurance you would have understood that the extent of coverage that is provided by the insurance policy could be largely insufficient with respect to the actual value of the vehicle.

How the value is reduced

The rate of depreciation for vehicles is quite high and with each passing year the value of the vehicle can be reduced by almost 15 to 20 percent. Let us assume that you have taken out a loan to purchase the vehicle and unfortunately you come across a situation when the insurer writes off the vehicle. They pay you the market value of the vehicle that is determined by applying the rate of depreciation and depending on how long you have used the vehicle it could be quite low as compared to the actual cost that you had paid for the vehicle. The outstanding amount of loan that you have to pay is higher than what you receive from the insurer and this differential amount has to be paid from your pocket. Does it not sound shocking? But there are ways to bridge this gap in insurance by availing the GAP insurance policy.

The ideal insurance package

To insulate your-self from all financial liabilities arising from situations when the insurer writes off the vehicle, a GAP insurance policy has to be taken along with the basic vehicle insurance policy. Both the policies would be effective concurrently, with the GAP insurance policy taking care of the impact of depreciation on the value of the vehicle. The gap between the actual value of the vehicle and the insurance payout is filled by the GAP insurance that relieves you from all financial liabilities that you owe to the lending company that financed the vehicle.

How big is the gap?

The gap in the value of the vehicle depends on two things – the age of the vehicle and the remaining tenure of the vehicle loan that you might have taken or the cash payout that was made during purchasing the vehicle. The older is the vehicle, higher will be the depreciation. The longer is the remaining period of loan repayment the higher will be the outstanding amount.

Whether to take a GAP insurance or not will have to judged on case to case basis.  Consideration of your financial liability and your ability to bear it is a determinant factor about availing GAP insurance. A close look at the figures would help you to decide if a GAP policy needs to be taken that can help you recover the actual cost of the vehicle.