As the old adage goes: As soon as you drive your car off the dealership lot, you’re losing money. Purchasing a car can be quite overwhelming, and many drivers are unsure about the specifics of the coverage included with their vehicle, let alone adding additional coverage. In this article, we will take a look at what GAP insurance is, what it covers and why you should consider it.
What is GAP insurance?
GAP insurance, also known as “Guaranteed Asset Protection,” is an optional type of auto insurance that offers coverage to protect you in the event that you experience a total loss of your vehicle or it is stolen.
How does GAP insurance work?
Most dealerships and lenders offer GAP insurance as a one-time premium. It can be rolled into your loan so you don’t pay out-of-pocket in the event of any of the aforementioned scenarios occurring. Lenders typically require that you buy collision and comprehensive coverage for the length of your lease or loan, so you’ll typically need both to purchase GAP insurance.
Your insurance policy alone will only provide coverage for the actual cash value of your vehicle. In other words, comprehension and collision coverage on your policy will cover what your car is worth at the time of the accident or theft. Luckily, this add-on coverage to the policy fills the “gap” between what you still owe on your loan or lease and what the depreciated value of the car is.
Why would I need to purchase GAP insurance?
GAP insurance is a great policy to have if you still owe a lot of money on your auto loan. There are certainly plenty of reasons why you may want to consider this type of policy; here are some scenarios where you may want to get it:
- You leased a new car
- Bought or are in the process of purchasing a new car
- You still have 60 months or more of financing left
- The current value of the vehicle has not yet been repaid
- You made a small or no down payment on the vehicle
- The vehicle is high-value and depreciates quickly
- You have no other mode of transportation
- An old auto loan was rolled into a new one
Let’s say you paid $35,000 for your car when you first bought it and its current depreciated value is $20,000. If you still owe $25,000 at the time that your car is either stolen or totalled, you would have to pay $5,000 out-of-pocket to settle the loan on your car. With this added coverage, your insurance provider would bridge that gap and cover you for the remaining $5,000.
Remember: the reimbursement provided by the insurer would go directly to the auto lender, not you.
Where can you purchase GAP insurance?
There are three places to get GAP insurance:
- From a GAP insurance company that will sell you a policy for a one-time fee
- The dealership or auto lender, whereby your premiums would be rolled into your car loan payments
- Your auto insurance provider
Things you should know before buying more insurance
There are certain things you should watch out for prior to buying into this add-on insurance policy, including the following:
- There are exclusions stipulated in the policy that could prevent you from being paid out. For instance, if it is discovered that the damage to your car is because you were driving recklessly or under the influence of alcohol or drugs, the insurer may not cover you.
- You need collision or comprehensive coverage already before you are able to top up your coverage with GAP insurance.
- Car dealers may not be the best place to buy GAP insurance from. The policy will likely be more expensive, and there may be a higher risk of being vulnerable to common car dealer scams. They may pocket your GAP insurance payment without providing you with any coverage or may offer you coverage filled with exclusions.
Do I need GAP insurance on a new car?
As mentioned above, new cars lose their value very quickly. Some can lose about 20% of their value as soon as you drive them off the lot! You’ll need to take a closer look at your numbers to determine if it is worth it – ask your isure broker any questions you may have!
Should previously-owned vehicles have it, too?
If you’ve bought or are thinking of buying a previously-owned car, you likely wouldn’t need to purchase additional insurance unless you financed it. Considering many used vehicles hold their value and typically have short loan terms, it may not be worth it. Remember, GAP protection is meant for situations when you owe more than the car is worth.
If I pay off my car loan, is my GAP coverage refundable?
When you purchase it as a lump sum, you can get a refund for the unused amount if you pay off your vehicle, in full. If you pay monthly, you will not be entitled to a refund, but you can cancel.
Is there a deductible associated with it?
No, there is no deductible that must be paid with it.
How long does GAP coverage last?
GAP insurance is usually not as lengthy as a typical car insurance policy. Instead, GAP coverage usually lasts around two years, after which your insurance provider may drop the policy. That being said, coverage length varies, so you would need to speak with your isure broker to get exact time frames.
Can you cancel your add-on insurance policy?
YES. You will want to cancel your GAP insurance when you owe less on your auto loan or lease compared to the vehicle’s market value. Cancelling your GAP coverage is also recommended when you’ve paid off your car loan.
What is the cost associated with GAP coverage?
The cost of GAP insurance varies in different situations. The average cost tends to hover around 5% of your comprehensive or collision insurance premiums, which can translate into a few hundred dollars per year. You can add GAP insurance to your current auto insurance policy while you repay your loan.
You may want to consider taking out additional insurance if you still owe a lot on your car and the depreciated value is significantly lower than what you paid for it. While not required, this type of insurance can give you some peace of mind, knowing that you’ll be covered if your car is ever totalled or has been stolen.
Be sure to weigh your options and assess your situation before paying for GAP insurance. Review the scenarios presented above to see if one fits your current situation, then contact your isure broker with any outstanding questions surrounding your policy coverage.