It’s sad but true: your newly financed or leased car starts depreciating the moment you drive off the lot. And that means that before long, the amount you owe exceeds the value of your vehicle. In fact, your first year behind the wheel will yield as much as a 30% decrease in lost value and nearly 20% in subsequent years.
This loss is a big deal if your vehicle is totaled or stolen … unless you have GAP Insurance. So, let’s find out what GAP insurance is, and if you need it.
What is GAP insurance?
GAP is a handy acronym that stands for Guaranteed Asset Protection, or sometimes Guaranteed Auto Protection. The purpose of this add-on insurance is to close the gap between the amount left on your loan and the value of your vehicle.
As an example, let’s say you finance your luxury vehicle for $40,000. A year or so into ownership – when the balance on your loan is $35,000 – you find yourself needing to replace your car. If the market value of your car were $30,000 at the time of theft or total, you’d be out of pocket $5,000 (plus your deductible) without GAP insurance. With GAP insurance, though, you’ll be responsible only for your deductible — and some plans even cover the deductible.
Do I need GAP insurance?
Some lenders and leasing companies require that you purchase GAP insurance, otherwise it’s optional.
GAP insurance is considered wise if you:
- Rolled negative equity into your new loan;
- Put down less than 20%;
- Finance over 48 months or more;
- Couldn’t cover the difference;
- Lease or finance your vehicle;
- Opt for a luxury brand;
- Purchase a long-distance ride or plan to regularly travel long distances.
Is GAP insurance affordable?
Elected through your insurance company, GAP insurance is a no-brainer addition to your policy. Typically around $20 per year, the peace of mind is worth the nominal fee. Bear in mind, though, that you must have comprehensive and collision coverage to be eligible to add GAP insurance.
You can purchase GAP insurance independently too. Most lenders offer it for a flat fee of between $500 and $700, and standalone GAP insurance is typically available online for $200 to $300. Rates can be impacted by your age, insurance claim history, your vehicle’s value, and the state where you reside. Buyer beware here; these companies are often unregulated.
What does GAP insurance cover?
GAP insurance will cover the gap between loan balance and actual cash value (ACV) if your car is stolen or written off as totaled. Every other scenario is off the table.
GAP insurance does not cover:
- Medical expenses or lost wages of anyone injured in an accident;
- Costs associated with the death of an involved individual;
- Property damage you cause (addressed under property liability coverage);
- Repairs that are within reason and do not constitute a total loss;
- Replacement for a stolen car that is quickly recovered.
When should I start and stop GAP insurance?
If you’re among those who would be wise to get GAP insurance, you should add it to your coverage during the few months of ownership, if not on day one of your loan or lease.
Terminate your coverage once you’ve sold your vehicle; paid down your loan to the point that your balance is close to or less than ACV; or earned your vehicle title.
If you purchase GAP insurance from your lender and soon after ascertain that you overpaid for it, act fast. Many independent outlets will let you opt out within the first 30 days.
Let’s talk about your options.
If you’re interested in learning more about GAP insurance, get in touch. The Independent Insurance Associates team is here for you.