Guaranteed Auto Protection Insurance (GAP Insurance) was originally created to protect drivers from the high prices of new vehicles. If a customer gets into an accident and totals their vehicle, resulting in a full loss of the vehicle most of the time gap insurance will kick in to cover the difference between what the current value of your car is and the loan that is still owed on the vehicle.
- 1 Do you need GAP Insurance?
- 2 Is GAP Insurance expensive?
- 3 How does it work?
- 4 Where is GAP Insurance available?
- 5 Who should get GAP insurance?
- 6 Who should NOT buy?
Do you need GAP Insurance?
Anyone who has purchased an expensive new car should consider buying this type of insures, especially if it is new. Also, anyone who is leasing a car should have GAP insurance, usually it is required, but if not be sure to look into purchasing it.
Is GAP Insurance expensive?
People often decide not to go with Guaranteed Auto Protection Insurance because of how expensive it is. Purchasing a new car and adding $750 or about 5% of your car’s sticker price for Guaranteed Auto Protection Insurance can seem like a little much to pay all at once, but it’s worth it. You would hate to drive a new car off the lot, have it stolen and not receiving the full value of the car from your insurance company. You can purchase Guaranteed Auto Protection Insurance up to a year after the purchase of your vehicle. Do not believe dealers who claim that you can only purchase it the day you buy your vehicle and from them only.
How does it work?
Gap insurance, also known as loan/lease insurance, covers the difference between the actual cash value of your vehicle and the amount you owe on that vehicle.
You’ve probably heard that a car depreciates sharply in value after driving it off the lot.
It’s true. If you buy a truck for $50,000, then that truck may be worth just $45,000 within two months of your purchase.
Now, let’s say you get into an accident within the first two months of purchasing your new truck. Your insurance will compensate you for the actual cash value of that truck, which is $45,000. However, you still owe $50,000 on your truck lease or loan. There’s a ‘gap’ of $5,000 between the actual cash value and the amount you paid.
Gap insurance covers this gap. In this case, insurance would usually pay you $45,000 for the actual cash value of your truck. If you have gap insurance, however, then you will receive $50,000 for your truck.
In summary, here’s how Auto gap insurance works:
- It covers a car you own, lease, or finance
- If your car gets totaled or stolen, you can make a claim under your comprehensive or collision insurance (depending on the cause)
- If you owe more on the loan or lease than the insurance payout for the totaled or stolen vehicle, then gap insurance will pay the difference
Where is GAP Insurance available?
GAP insurance is available in most states, however not all. CT, LA, NH, NY, VA, VT and WA do not allow vehicle owners to carry this type of coverage. Most insurance companies have GAP insurance as an option, but not all, so be sure to ask before you decide on an insurance provider.
Who should get GAP insurance?
It’s crucial to keep in mind that gap insurance is a specialty product. Most people aren’t going to require it. You’ll likely be able to skip it altogether. If you purchased the car in cash, it’s useless. And, if you put up a big down-payment at the dealership, there’s a pretty minuscule chance that you’ll ever see an “upside-down” on your loan.
Taking out a policy is a good idea if:
- You have a loan payoff period of five years or more
- You’ve got a lease on the car
- The car you have has a history of quick depreciation
- You put a lot of miles on the odometer every year
- You put 20% or less down when you purchased the car
- You drive a brand new car (gap insurance isn’t recommended for used cars)
Even if you have a tiny amount of negative equity, gap insurance is a good idea. If you have the ability to pay the deficit from your own pocket, you might be better off just risking it. Gap coverage, like other types of insurance, is smart for people who wouldn’t be able to deal with a worst-case scenario.
Gap insurance is sometimes built right into car leases, so it’s a smart idea to look at the contract before you go out and get gap coverage on your own. You shouldn’t pay a premium for something you already have.
It can be useful in the following situations:
- You are leasing or financing a car (gap insurance may be required)
- You rolled negative equity from your last car loan into your new car loan
- You purchased a vehicle that decreases in value faster than other vehicles
- You made a down payment smaller than 20% on your vehicle
- Your car loan is longer than five years
Ultimately, it’s up to you to decide whether you want gap insurance based on your budget and aversion to risk.
Who should NOT buy?
Buyers who already have monthly payments layed out and are onto of making sure that they will not be making payments for a long period time. If this is your case than GAP insurance may not be worth buying. The cost of GAP insurance may be too high for the short period you will be making payments.