Today I’m continuing my layman’s attempt at helping you better understand the various types of insurances that are available. I’m going to give this a KISS (Keep It Simple Simon) and a prayer that I can provide you with valuable information as it relates to Gap Insurance for both medical and auto.
Gap Insurance (Auto) – Any idea what that might be? I will give you a hint, it’s not insurance that you take out to ensure you don’t rack up a balance at the GAP store on your credit card! If you answered something like the difference between a car’s actual cash value versus the loan balance (how much you owe on it) then you are correct. The “gap” in the car’s actual cash value versus the loan balance can be caused due to depreciation. As you may know, a new car can depreciate by as much as 25% by simply driving it off the dealer’s lot. A gap can also be caused by financing “negative equity” from a previous vehicle in with your new loan. Negative equity is when you owe more on your car than it’s worth.
Gap insurance can be offered to those who are financing or leasing a vehicle. Typically the car dealership will offer this insurance when signing loan documents but note; typically it’s more expensive to purchase it at the dealership than it is from your own insurance company, bank or credit union that might be financing the auto loan. Gap insurance typically can be purchased anytime during your loan and can be cancelled once you no longer have a “gap.”
You may be asking yourself, “Do I need to purchase gap insurance?” Well I will let you be the judge of that but here’s an example to help you better assess your need. You purchase a new car for $20,000 and have a loan balance on it. One day some crazy driver pulls out in front of you and totals your car. You are thankful that you were unharmed and you both have auto insurance. Everything is good right? Yes, until your insurance company informs you that the Actual Cash Value of your car is $16,000 (due to depreciation) and you still owe $18,467. That means there is a “gap” of $2467 that you are responsible to pay for out of your pocket because your car’s Actual Cash Value is less than the loan balance. You will be paying $2467 for a car you no longer have. This is where gap insurance might benefit you. Generally gap insurance can pay up to 25% of the car’s Actual Cash Value if it’s a total loss (varies by insurance company).
However, the good news is this… If you have transcended the “gap” (you owe less on your car than it’s worth or you have paid it off) then you won’t need Gap insurance as long as you have adequate insurance coverage through Comprehensive & Collision policy. You are encouraged to check the loan balance of your vehicle, the Actual Cash Value of your vehicle, and then speak with a professional if you still have questions regarding the need for Gap insurance coverage.
Gap Insurance (Medical) – Guess what? There’s also gap insurance to help cover medical costs. As you may have experienced from your own personal situation in the past, most medical insurances cover only a portion of your overall medical expenses thus leaving you to pay the co-pays and deductibles. Depending on the type of medical treatment you receive, this could leave you owing a large amount out of your own pocket. According to a CBS News Poll conducted in December 2014, 52% of those polled say the amount of money they have paid for out of pocket health care costs have gone up over the last few years due to more expensive medical treatment rather than an increase in the amount of treatment they are receiving.
Is medical gap insurance right for you? The answer to that question may be better answered after assessing your healthcare needs versus the cost of obtaining gap medical Insurance. Insurance premiums take into consideration various things such as age, gender, smoker versus non-smoker, past medical history, and health benefits coverage, to name a few. Many employers offer medical gap insurance as well as private health insurance companies. If you are considering purchasing medical gap insurance, you are encouraged to speak with a trusted adviser who is licensed by the State in which you reside. Each state has a Department of Insurance that carefully regulates the insurance industry, including licensing.
If you determine that medical gap insurance is not right or affordable for you, speak with your Human Resources Department to see if your employer offers a Flexible Spending Account for Medical. FSA’s are IRS-approved, tax-exempt accounts that allow you to contribute a maximum of $2550 (for 2015) into a set aside account to pay for eligible medical expenses. Keep in mind, any FSA funds not used during the plan year will be forfeited.
Stay tuned for an upcoming blog that will address Homeowner’s Insurance, Flood Insurance, and Private Mortgage Insurance, and read part one here!