The gap insurance market in Australia is transforming with the introduction of POMI (Peace of Mind Insurance) Pty Ltd, a new provider that allows motorists to purchase it online rather than being sold the product by a car dealer.
Gap insurance, which stands for ‘guaranteed asset protection', covers drivers who have a loan or finance for their vehicle. It is often termed as a ‘financial safety belt' because it reduces the risk of financial loss if your car strikes disaster.
If your car is written-off due to accident, theft or damage, your comprehensive car insurance will generally cover the loss of your vehicle at the current market value. However, if you have a car loan or your car is under finance, your lender will still require the balance outstanding that is unpaid on the contract.
For example, Dennis purchased a Mazda CX7 second hand from a car dealership for $38,000. After he traded in his Toyota Corolla for $5,000, Dennis financed his new car for $33,000.
Two years after his purchase, Dennis was in a car accident and his Mazda was written-off. The market value on his car is now $17,000 but he still owes his financier $25,000. Dennis is covered for the write-off by his insurer and receives a cheque for $17,000, but still owes $8,000 for the purchase.
This shortfall is a common occurrence when the market value falls faster than the car loan is paid off. If Dennis paid for gap insurance, he would be covered for the short-fall of his outstanding balance of $8,000 and could even be compensated for any inconvenient out of pocket expenses, of up to $8,000. These unforeseen costs quickly add up and can include damaged items including computers and tradies tools', insurance excess, and the banks' break fees. In this case Dennis is covered for an $11,000 shortfall.
Traditionally, gap insurance is offered by the car dealer when you purchase a car and is usually included into the loan. However, this method of payment means you are paying interest on the insurance. Over five years this can amount to a substantial amount, and it can increase the risk of ‘minus equity’ as it doesn’t add value to the car
If you are paying $7 per week on top of your car loan for gap insurance for instance, and with an average interest rate of 10 percent, this would end up costing you $1,820 after five years. Whereas the new gap insurance online method by POMI (Peace of Mind Insurance) Pty Ltd, encourages its customers to pay either upfront or over 12 months. Once paid the premium covers the term of the loan which works out to be less than $200 per year for a 5 year loan.
POMI's average cost per week for the 12 month payment method is $21, which means it would cost $1,092 for gap insurance – that is a potential saving of $728 compared to including the insurance into the finance of the car purchase. Add another $100 to that saving if you pay 'up front'
When deciding if you need gap insurance, always read the product disclosure statement carefully to make sure the product is right for you.