Gap Insurance on Your Car
You have just become another statistic on South African roads – your car was written off in an accident or it was stolen. Thank goodness, you had comprehensive insurance. Six weeks later the insurance company settles your claim, but you had a finance agreement and the insurance company have to settle the outstanding loan first. Then you get a statement from the finance house (bank) that there is still an outstanding amount on the loan. How is that possible!?

We will try to explain this very unpleasant experience and also give you some advice on how you can prevent this from happening to you. You bought your car for R100 000 and insured the car for R100 000. But as soon as you drive off the dealer’s floor with your new car the value starts to depreciate. Some cars may even depreciate by as much as 40% within the first year! Let’s be optimistic and say that your car has depreciated by 15% (the average depreciation rate) after one year.

Then your car is stolen. The market value of your car is now R75 000 but you may still owe the finance company R80 000. The insurance company will also deduct the excess (the first amount payable by yourself) of, let’s say, R7 000. They will pay the bank R68 000.

Mind the Gap!
If you have had the privilege to travel on the Underground in England you will be well aware of the famous saying “mind the gap” just before the train doors open at every underground station. Well, you should mind the gap in car insurance – as our example shows you now still have an outstanding balance of R12 000 on the car loan, after the insurance has settled your claim at market value. You are left with a gap of R12 000, and you don’t even have wheels!!

So, to answer the question posed in the title of this article, NO, the insurance company does not cover credit shortfall. Credit shortfall is the name used for the difference between your car loan balance and the amount paid out by insurance. But don’t despair. You can take out additional insurance to cover yourself against such an unfortunate event. This is called top-up or gap insurance.

Where do I get Top-up or Gap Insurance?
Top-up insurance is available at most insurance companies that sell car insurance. When you buy a car and arrange finance through a car dealer the dealer may also offer you this kind of insurance. Don’t take out any insurance without doing your homework first.

Do I need it and for how long?
You will only need to take out top-up insurance if there will be a shortfall or gap as we have described above. If you were lucky enough to have put down a big deposit when you bought the car, you will not need top-up insurance. What you need to do is take charge of your financial position – regularly establish what the market value of your car is and compare that to the outstanding balance on your car finance. This will confirm if you still need top-up insurance. Two years after you took out the loan is usually the break-even point.

Don’t forget to cancel the top-up insurance when you no longer need it. On the other hand we need to give a word of warning here. Some insurance companies’ top-up products are only valid for a year where after it expires. If you still require the cover you need to arrange with the insurance company to renew the top-up insurance for another year. This is not the case with all top-up products but please confirm with your insurer or broker who sold you the cover what the rules are pertaining to the product you bought. Read the fine print, as with any insurance policy.

Don’t forget the excess
Even if you took out gap-insurance you must remember that you are still liable for the excess. Indeed, you can take out additional insurance to cover your excess shortfall. (O dear, more insurance!)

Check the current value of your car
Also remember to take into account what value your insurance company uses for insurance purposes. There will be a difference in the amount paid out should there be a total loss between retail and market value. Checking the value of your car at least yearly makes good sense. You need the value to establish if you still require top-up cover and you should also ask your insurer to reduce the value of your insurance in line with the value of your car; there is nothing to gain by being over-insured. When you apply for finance at a bank they also require the current value of your assets, another reason for you to stay up-to-date.

Credit Life Insurance
Credit Life Insurance should not be confused with top-up insurance. A credit life policy will settle your outstanding loan on your death or permanent disablement. Yes, another type of insurance.