Gap Insurance Explained – Should You Get Gap Insurance?
The insurance provider will cover the depreciated worth of your newer automobile if it is stolen or declared a total loss. During the time of the loss, the depreciated value is calculated, and it may be less than the outstanding balance of your loan or lease. Gap insurance is intended to fill this void.
After a total loss, the gap between how much you owe on your automobile and what your insurance provider pays you is covered by gap insurance, also known as guaranteed asset protection.
You should keep it until the debt on your automobile is less than its current market value, at which point you can get rid of it. Nevertheless, you should only get gap insurance if you have a loan or lease on your automobile.
Let’s take a closer look at what gap insurance is and how it works.
What is Gap Insurance?
Gap insurance, also known as Guaranteed Asset Protection, is a type of auto insurance that pays the difference between an automobile’s loan balance and the actual cash value (ACV) in the case of a total loss or theft.
It’s natural to have questions about gap insurance if you’re thinking of buying or leasing a car, or if you’ve already done so. Gap insurance is normally an extra layer of protection for motorists, but it may be a requirement of your loan or lease.
Since both comprehensive and collision insurance only cover the car’s current market value, drivers who have funded or leased their automobiles and owe more on the loan or lease than the automobile is worth can benefit from gap insurance.
How Does Gap Insurance Work?
Let’s say you were in an accident that rendered your car undrivable and needed replacement. Your auto loan balance is still $18,000, but your car is only worth $15,000.
After subtracting any applicable deductibles, the $3,000 gap between your outstanding loan balance and the car’s fair market value would be covered by your gap insurance policy. The deductible is covered by some policies as well.
Keep in mind that gap insurance is often only valid for brand-new or model-year (or newer) automobiles that are totaled or stolen. Even if the loaned sum is more than the car is worth, accidents, damage, repairs, or a sale or trade-in are not covered.
Moreover, it won’t assist you in replacing your old automobile with a new one; for that, you’ll need new automobile replacement insurance.
What Does Gap Insurance Cover and How Much?
If you totally or severely damage your automobile and have a larger loan balance than the car is worth, gap insurance will kick in to help you cover the difference. You can use your gap insurance to get your funds back if your car is stolen or written off in an accident.
In the event of an accident, gap coverage will not pay for the whole cost of fixing or replacing your car or for medical bills, repairing or replacing another person’s property damaged in the accident, or renting a new automobile.
Dealer or creditor-provided gap coverage is often more expensive than purchasing it separately through your auto insurance policy. Nevertheless, the price of your gap insurance may vary depending on a number of circumstances. Your actual cash value (ACV), location, age, and the number of claims filed will all be taken into account by your insurer.
Who Offers Gap Insurance?
Generally speaking, there are three options that offer gap insurance:
- From your car insurance company, as part of your normal premium.
- Originating from an organization whose exclusive focus is the distribution of gap protection plans. Individuals can get gap insurance from a company like Gap Direct on an as-needed basis.
- Include it in your monthly loan payment at the dealership or with your creditor. The sum of your gap insurance will skyrocket because you’ll be paying interest on it for the duration of your loan.
Consider the following if you are financing or purchasing through a dealership:
- First, find out if your auto loan arrangement requires gap insurance. It’s not common, but some creditors may insist on having this protection in place. But your creditor almost certainly will insist that you carry Collision and Comprehensive insurance.
- Depending on the terms of your lease, gap insurance may be bundled in automatically by the dealer.
- You could get out of your gap insurance contract if you purchased it from your dealer but now want to get it through your insurer. If you are switching service providers, make arrangements to maintain continuous coverage during the changeover.
Gap Insurance: Pros and Cons
Even though it’s an added expense, gap insurance can provide substantial additional security in some circumstances. If getting gap insurance isn’t mandatory for you, but you’d still like to, here are some things to think about:
- If you have gap insurance, you won’t be left with as much debt after an accident.
- You may be able to acquire a more expensive car without as much anxiety.
- The cost per year is minimal, normally $100 or less.
- Once the gap between your loan and the car’s value is too wide, it may no longer be worthwhile to keep the automobile.
- On top of rent or mortgage payments and routine maintenance, this is another expense to consider.
- Paying a cheap price upfront may negate the need for this.
Is Gap Insurance Worth It?
Gap insurance could be beneficial if you placed less than 20% down when financing your automobile. Similarly, if you plan to put a large number of miles on your car, buy an expensive automobile, or extend the length of your loan (to 60 or 72 months), you will end up paying more for it overall.
Gap insurance is recommended for those who are underwater on their loan, meaning they owe more on their car than it is worth. But if your loan sum is lower than your car’s value, gap insurance might not be worthwhile. Because of this, many automobile owners decide to terminate their gap insurance policies whenever their loan balance is less than the car’s market worth.
Can You Cancel Gap Insurance?
Contacting your insurance provider is the first step in terminating your gap policy. Cancellation fees are possible but should be minimal, and refunds should be calculated on a pro-rated basis according to the length of time you’ve been covered.
It may be too late to terminate gap insurance if you financed the premium into your auto loan from the dealership.
Other than where expressly noted, in your loan or lease agreement, gap insurance can normally be terminated at any time.
After you terminate your policy, you will no longer be responsible for making payments toward your coverage. If you settled for your insurance in full, you might be eligible for a refund from your insurance company.
When the difference between your auto loan and the car’s actual cash value is less than the difference, you may want to think about terminating your gap insurance policy. Seek out a car appraisal to find out how much your automobile is worth.
Alternatives to Gap Insurance
If your automobile is stolen or totaled, you have options beyond gap insurance to cover your losses. Look at these alternate possibilities.
- New-car replacement insurance – You should choose new-car replacement coverage if you’re more concerned about replacing your automobile than about making payments on your current one (although more costly). If your car is totaled, this coverage can help you buy a new one of the same model and make it without having to spend anything out of pocket beyond your deductible.
- Better-car replacement coverage – Total loss coverage provides financial assistance toward the purchase of a replacement car that is newer and has fewer miles on the odometer in the event that your current automobile is written off.
If the balance of your car lease or loan exceeds its worth when it is declared a total loss, gap insurance, also known as guaranteed asset protection, will pay the difference.
When you have neither a loan nor a lease on your automobile, you don’t require gap insurance since it only applies in situations where the cost to repair or replace the automobile is more than the sum still owed on the loan or lease.
If you’re worried about being stuck with a sizable charge to repay a car you no longer own, gap insurance may be a stellar investment. You should check the calculations to assess how “upside down” you are on your existing auto loan. In the case of a car accident, you may receive little to no compensation if your loan installment is near the real cash worth of your automobile.
Fortunately, gap insurance isn’t something you’ll always need. In most cases, you can cancel your gap insurance policy at any time, unless otherwise specified in your loan or lease agreement. You have the option to cancel your gap insurance policy if you find yourself in a scenario where your car loan leaves you with a negative equity balance.