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Auto Insurance Guaranteed Asset Protection

In spite of the fact that most of us are fairly familiar with auto insurance and the basics of our insurance policies, there are still some optional forms of coverage not many drivers understand completely-like guaranteed asset protection. Many of us have heard the term "gap coverage" thrown around when we purchase or lease a new car or truck, but are not even aware that the first word is really an acronym standing for guaranteed asset protection (GAP). Guaranteed asset protection is an important if often misunderstood auto coverage option.

Filling Gaps in Auto Coverage

Gap coverage is an interesting term in that even though it is an acronym for a longer name for this coverage type, even in its shortened form it gives a great hint as to the kind of coverage it provides. In a very simplified nutshell, gap insurance is coverage that covers the gap between what you owe on a vehicle and what it is actually worth. This may seem like a superfluous coverage type to those of us who owe money on a vehicle and are thus required to purchase "full coverage" until we pay it off. Further explanation will shed more light on guaranteed asset protection and its importance to certain auto insurance policy holders.

To most of us, the idea behind full coverage auto insurance is that it pays for everything. We purchase policies with collision and comprehensive insurance and think that our coverage is complete. If this describes you, do not fret, because many of us are in the same boat. The truth is that both collision and comprehensive auto insurance are limited in the coverage they offer based on the actual cash value of the insured vehicle. Their coverage limits have nothing to do at all with the amount of money you owe on your bank loan. This can present a problem to many car buyers who go to the dealership with very little or no money in hand when they make a new car purchase.

When you buy a car and ownership transfers over to you, it immediately becomes a used car, even as you are driving it off the lot. If you try to sell it a week later, having not even made a single payment, you will never get the full sticker price you paid to buy it in the first place. This is because anyone can go to the dealer and buy that same car brand new for the same price you paid-maybe even for less. The depreciation of a new vehicle-the amount of value it loses-is very steep when it is newer. Depreciation outpaces the rate at which you pay down auto loans in the early months (and sometimes years) of the loan repayment.

Adding to this trouble is the fact that not all the money you are paying is going to principal (except in zero percent interest situations). In all likelihood when you take on a new car loan with little or no money down, it may take half the loan repayment schedule or more to get "ahead" of depreciation in terms of the principal balance. Vehicles are not like houses and other properties that historically go up in value. This is why a degree of caution always has to be used when you purchase a car using a bank loan. You are essentially paying principal and interest for several years on a vehicle that is depreciating at a rather alarming rate. By the time the loan is paid off, most vehicles are worth a small fraction of the original sticker price-usually half or less.

GAP Coverage Protects Auto Owners

To make this discussion more concrete, let us imagine a specific financial circumstance involving a new car purchase. If you bought a $30,000 car and only out down $1,000 your principal balance as you drive off the lot is $29,000 (if we exclude all the extra fees that would actually drive this figure much higher). By the time it reaches your driveway that evening, the fair market value of that car-the actual realistic amount of money you could get for it if you were to attempt to sell it-might be only around $27,000 or less. If you were to get into a car accident and total the car, your auto insurance coverage would issue you a check for that fair market or actual cash value. But you wouldn't even see the $27,000, because your deductible would be taken off the top of any money sent to you. So you might be facing a deficit of somewhere around $4,000 for a car you got to drive for only a short period of time.

In spite of the fact that this hypothetical car was totaled, you are nonetheless bound by your original vehicle purchase agreement and the terms of your auto loan. In other words, you are responsible for that $4,000. All the money you have put into your auto coverage will not save you from this additional expense-unless your personal auto insurance policy includes guaranteed asset protection on this car. For a relatively small additional fee, you can add guaranteed asset protection and save yourself the worry of this nightmare scenario ever unfolding. Without GAP coverage, you might not even be in a position to be able to buy another car at all if you are in a wreck. With this important coverage, you are protected from this type of circumstance and you truly have full coverage as it pertains to protection against the financial investment you have made in the covered vehicle.

GAP Protection Not Always Needed

Guaranteed asset protection is an important and helpful form of auto insurance coverage that can come in handy in many situations. It is very helpful to many auto owners who finance or lease their vehicles. But it is not for everyone, nor should it be carried on every vehicle or for an unlimited length of time. There are certainly limits to the usefulness and the need for GAP insurance on your auto policy.

Just as it is important to add this sort of coverage to round out your auto insurance protection when you make a new vehicle purchase or lease a vehicle, it is equally important to know when to cancel or drop this sort of coverage. It ought to be quite obvious given the definition of guaranteed asset protection that it is really only useful in situations when a vehicle is not owned outright-that is, when you are repaying a bank loan or are leasing. But if you are able to put a sizeable down payment on a new vehicle purchase, and you can limit the amount of time it takes you to repay any financed amount, you probably do not need this kind of coverage at all. Contact your insurance carrier for more details about the specifics of when you should add or subtract GAP coverage from your personal auto insurance policy.

Auto insurance guaranteed asset protection need not be a mystery. Find out more about it and it applicability to your circumstances, and find out if it is right for you.

 

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