A requirement of all vehicles in the United States is that they must be insured – at least for a minimal amount – before being allowed to drive on the road. Every state (except for Florida) requires bodily injury liability insurance; all states (plus Washington, DC) require property damage liability; and almost half of the states require some level of uninsured/underinsured motorist insurance.
But what if you lease a vehicle? You may need an additional type of insurance called Guaranteed Asset Protection (GAP) to help make your payments if the vehicle is stolen or totaled. Let’s take a look at what GAP insurance is and how it can benefit you.
How is Leasing Different Than Owning a Vehicle?
Leasing is similar to renting. It usually means that you make an upfront payment on a vehicle, then subsequent monthly payments in order to be able to use the car for several years.
Leasing a vehicle usually requires smaller monthly payments than buying a vehicle. Additionally, because leased vehicles are typically new, or close to new, they will be covered by warranties that could make maintenance more affordable. At the end of the leasing period, you return the leased vehicle to the company; you aren’t left with a vehicle to trade or sell. Leasing could be a good option if you like to drive newer cars, as upgrading to the latest model could be more inexpensive than buying a new one.
Financing or purchasing a vehicle outright means that it becomes your property. If you choose to purchase a vehicle with a loan, the payments that you make on that loan go towards paying off the total due on the vehicle. Of course, once it’s paid off, it’s yours to keep, trade in, or sell.
What is GAP Insurance?
Whether you lease or own a new vehicle, the value of the vehicle depreciates as time goes by – but usually this depreciation happens more quickly at the beginning. A new vehicle can depreciate by as much as 20% in the first year. If something happens to the vehicle, most auto insurance policies will pay for the depreciated value, or market value, of that vehicle at the time of the incident.
GAP Insurance is designed to cover the difference between what you owe on a vehicle and what a vehicle is worth. GAP insurance offers a great way to make sure you are protected financially if you have outstanding financial obligations on your vehicle and it is stolen or totaled. You can have a GAP insurance policy on both leased and financed vehicles, but it works a little differently between the two.
How Can GAP Insurance Be a Benefit for a Leased Vehicle?
You can determine the GAP amount you would need covered for a leased vehicle by calculating the amount that would be due if you were to have to terminate a lease agreement early, including any past-due amounts. In other words, it can help prevent you from having to pay for use of a vehicle that you no longer have possession of (if it were stolen or totaled) due to a lease contract.
Sometimes GAP insurance is included or required in lease agreements, but if it isn’t, it could be a good idea to purchase it separately. Depending on the insurer, GAP payments can be one lump sum or separated out into monthly payments.
How Does it Work Differently if a Vehicle is Financed?
Most leased vehicles have a buyout option that would allow you to purchase the vehicle you were leasing. You can convert your lease to a loan. If you decide to shift from a lease to a financing agreement soon after you’ve gotten the car, the amount that you will need covered will likely change – which means you may need to get a new GAP policy.
What Does GAP Insurance NOT Cover?
GAP insurance does not cover you the way that bodily injury liability insurance or property liability insurance do. It is intended solely to cover the Actual Cash Value (ACV) of your vehicle if your car is totaled or stolen. GAP insurance will not cover incidents like:
- Lost wages or medical expenses of people involved in an accident
- Financial obligations due to the death of an individual in an accident
- Property damage
- Repairs to the vehicle
- Replacement for a stolen, but recovered vehicle
If you’re considering GAP coverage for your leased or financed vehicle, contact us at Independent Insurance Associates. We can help you determine your best options and determine how much coverage you need!