What Is Gap Insurance?

Car ownership is a great responsibility. You want to ensure that you have protection from the time you drive off the lot. In fact, during the purchase process, you will be introduced to ways to further protect your vehicle. One of these is GAP insurance. But what is GAP insurance and how can it protect your purchase?

In my nine years of auto insurance experience as a licensed insurance agent, I have seen both sides of the equation. Through this article, I intend to show you the importance of this add-on and how it can protect you from future financial hardship should you experience a total loss of your new vehicle.

How Does Gap Insurance Work?

The moment you drive off the lot your vehicle depreciates. In fact, a car loses up to 40 percent of its worth within the first five years. When one experiences a total loss of a vehicle, whether it be theft or an accident, there will be a price gap between what you are currently paying and what the car is worth. The max a car insurance company will pay is only what the car is worth. For example:

As you can see, without Gap insurance you will still have to make car payments on a car you no longer own for another $5500. Let’s look at a scenario with Gap insurance:

Having Gap insurance pays the remaining $5500 you would owe to the finance company, leaving you with a zero balance due.

Is Gap Insurance Required?

Gap insurance is not mandated by law in any of the fifty states. However, Gap insurance may be required by your finance company. Also, if you are purchasing Gap from the dealership, you must maintain auto insurance for your Gap policy to be valid. If you drop your auto insurance and experience a loss, your Gap policy will not pay out.

When You Might Need Gap Insurance

Gap insurance would be beneficial if:

• You made a small down payment when purchasing your vehicle. Remember, a vehicle depreciates when you leave the lot. If that down payment is smaller than that depreciation value, you will be upside down.
• You drive more than most. The more you drive the quicker the vehicle depreciates.
• Purchased an extended-term loan. It takes longer to hit the break-even point on your loan.

All of these situations are about risk. Whether it be financial or physical, you must look at protecting the investment of your automobile. The more you are on the road, the more risk you place yourself in. Having Gap Insurance protects you should you need to file a claim due to one of these risks and fall short when the finance company does its assessment.

What Does Gap Insurance Cover?

The first thing you need to know about Gap insurance is that you will need to carry Comprehensive and Collision on your insurance policy. When you file a claim your insurance company will pay the Actual Cash Value of your car whether it was stolen or totaled in an accident. Then, your Gap policy will pay the remainder, if any, to the finance company.

Gap insurance covers:

• Vehicle theft – this can be whether your vehicle is unrecovered or recovered but damaged beyond repair.
• Auto accident where vehicle is totaled (major accident) – Some accidents can cause more damage than others.
• Auto accident where the vehicle is a total loss (minor accident) – Even a damaged front end or headlight on a vehicle can cause a total loss. When your vehicle is inspected, the assessor will determine the damage based on parts and labor cost, determining repair cost.

What Does Gap insurance not cover?

• Mechanical issues – engine failure and other maintenance-type issues are not covered under a Gap policy.
• Accident Injuries – Gap is designed only to pay off the vehicle loan. It won’t help for injuries or death of an occupant of the vehicle in the event of an accident no matter who is at fault.
• Payments and Deductibles – You must still meet your deductible for your insurance to kick in. You must also pay any fees incurred and if you are behind on your monthly payments, you are responsible for making those past due payments. Gap only pays for the current and future payments.
• Car Replacement – While Gap will pay off your vehicle, it will not help you get into a new one.

How Much Does Gap Insurance Cost?

Gap insurance can cost from as little as $20 per year to several hundreds of dollars depending on where you purchase your policy.

When you purchase through an auto insurance company it can be far less expensive. According to the Insurance Information Institute Gap insurance can be found for as little as $20 per year. However, not all insurance companies offer Gap insurance or provide it in every state.

Where To Get Gap Insurance

You can obtain Gap insurance from either the dealership and finance company where you purchase your vehicle, or you can find it through an auto insurance company. You will find that the cost can vary dramatically.

Purchasing it through the finance company you will have to pay interest because it is built into the cost of the automobile throughout the lease. When you elect to buy your policy through an auto insurance company, it will be much cheaper because the interest factor is removed.

Most auto insurance companies offer Gap insurance; however, it will depend on the state you live in as to availability and cost. It will also vary by provider as it is a competitive market.

Is Gap Insurance Worth It?

One thing to look at is how much the car is worth versus how much you have left to pay on your lease. Thus, determining Gap Insurance worth would depend on a couple of factors:

• If you made a large down payment, you may not need Gap Insurance.
• If your lease is short-term, you may not need Gap Insurance

You will want to review your car’s value the closer you get to paying off your vehicle. You can cancel the coverage once the amount you owe on the car is less than its market value.