When you begin your auto insurance policy or purchase a new car, gap coverage and accident forgiveness are two types of coverage that might appeal to you for different reasons.
Gap coverage is also referred to as loan-lease coverage. This coverage offers you extra money for your totaled vehicle in the event that you need extra money to pay off excessive loans you had on the car or for extra financial obligations regarding your leased car. Sometimes the extra money is capped at 25% of the actual cash value of your totaled vehicle. Car salesmen and dealerships may offer to sell you gap coverage, but your insurance carrier can probably offer this coverage to you for a much lower price if you qualify.
Gap, or loan-lease, coverage is crucial in cases where the car owner is “under water” financially when comparing the value of the vehicle to the amount of the auto loan. If you purchase a car that’s worth only $10,000 but end up financing it for $12,000, you are considered to be under water financially. In this example, if the car is totaled and only $10,000 is paid to the owner, they will still have a $2,000 shortfall when paying the auto loan. If you have gap coverage, you will likely be reimbursed for the shortfall.
Adding this coverage to your policy generally costs about $50 per vehicle and can be done only if you have an auto loan or a leased vehicle and carry both collision and comprehensive coverage. Your car has to be 5 model years old or newer, and you need to add the coverage immediately upon purchasing the vehicle.
Accident forgiveness is a totally different type of coverage. If you purchase this coverage and suffer an “at fault” accident during the current policy term, your insurance company will not apply the usual surcharge to your policy in subsequent years. This works only once, which is to say that if you have multiple at fault accidents, your insurer will forgive only the first one you had after purchasing this coverage. You need to have a good driving record in order to qualify for this coverage, and the cost for it ranges from 6% to 10% of your total policy cost with most of the auto insurers we use.
Applying some quick math to the cost-benefit of purchasing accident forgiveness would look something like this: If someone pays $2,000 per year to insure two cars, their accident forgiveness would likely cost about $150.00 per year. If they have an at fault accident during the year, they will avoid upward of $1,800 in surcharge points in subsequent years. It’s a gamble either way you look at it, but for some people it offers peace of mind.