Gap insurance is a kind of Auto insurance that most car owners purchase from insurance companies in order to protect themselves against losses that can arise when the amount of compensation received from a total loss does not fully cover the amount the insured owes on the vehicle's financing or lease agreement. This situation arises when the balance owed on a car loan is greater than the book value of the vehicle.
For example: Gap insurance covers the difference between what the car is worth and what you owe on the car. It comes into play if the car is stolen or totalled (damaged to the point that repair would cost more than the car is worth) while the owner is still making payments.
In the present modern economical scenario, Gap Insurance is absolutely essential for themodern car owner since most cars are purchased on installments or on lease agreement When a person buys a new car on a loan ,it looses about 20% of it value in just a few months of its purchase whereas it has been purchased on a significant small down payment of say 5%or 10% ,hence it is essential for a person to buy Gap insurance to cover the difference The Following Example clearly illustrates the Importance of Gap Insurance Mr Vijay buys a car of Rs 2,00,000/ value by paying a down payment of 10% of
the value ie Rs20,000/. and insures it accordingly for R 2,00,000/.However ,after 2 months,its insurance value depreciates to 20% of the Book Value ie 20% of 2,00,000 ie by Rs 40,000/ .Unfortunately ,the car gets stolen.In this case, the insurance company will pay him Rs 2,00,000/ less 20% ie Rs 40,000/.==Rs 1,60,000/..whereas he has to pay the car company Rs 1,80,000 less two months EMI say Rs 2000/ per month x2 months =Rs 4000/.ie Rs 16000/ from his own pocket .
In case Ajay had taken Gap insurance, then the Rs 16,000/amount would have been covered by the insurance company. Hence it is very essential to have Gap insurance