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What is Gap Insurance?

Gap Insurance is an acronym for Guaranteed Auto Protection insurance. If you have been following our previous articles on car insurance, you must have come to understand that there are more to learn about car insurance. If you desire adequate coverage for your car, you must have learnt that no single car insurance policy can provide all the coverage you will need on your car. Even with comprehensive car insurance, there are still many exclusions which your insurer will not be responsible for. For instance, it was mentioned in the previous article that even though you have comprehensive car insurance policy, the insurance company will not help you pay your car loan balance if the car is totaled in an accident. This is true. However, the good news is that, almost everything about your car is insurable nowadays. Some car insurance policies that were not available before are now being offered by different insurance companies. Some of these policies can be purchased as add-ons to your main car insurance policy. One of those add-on insurance policies is gap insurance.

So, what is gap insurance? What does gap insurance cover? Is gap insurance worth it? These are the questions this article will try to answer. Gap insurance is that type of insurance that covers the difference between your car loan and the cash value of your car in the event that the car is totalled. Please note that the cash value of your car is not the same as your car purchase price. The cash value of your car is usually lower than its purchase price because of depreciation which might be caused by wear and tear, damp, rot, damp, rust and corrosion or due to obsolescence. The only exception is when you just bought the car anew. For instance, if you just bought the car and you are taking the car out from the dealer’s premises and one trailer just crushes the car, the cash value may be the same as the purchase price. At that time, you have not used the car for anything. In fact, it is still in its new status.

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Features of Gap Insurance

It is optional: Gap insurance is not made compulsory by law. Once a driver is able to buy the required minimum car insurance coverage as specified by the government in the State where you live, you have fulfilled the law. The only reason you may choose to opt for other coverage is when you or your lender is of the opinion that the required minimum car insurance coverage is not adequate for your car. However, if your car is financed, your lender may make gap insurance compulsory for you as add-on to collision and comprehensive insurance.

It is refundable: Guaranteed auto protection insurance premium is usually paid upfront. If it happens that you later sell or refinance the car before the auto loan is fully paid off, you can request for refund. However, you will not get the total premium you paid, it will be prorated.

What does gap insurance cover?

Gap insurance covers the amount you are owing on your car loan minus the cash value of your car. However, if you have deductible, you may need to pay it from your pocket. That is why you need to find out from your gap insurance provider if it will also cover your deductible. I think it is better to illustrate this with an example. Supposing you have an auto loan of $22,000 while the cash value of your car is just $19,000. If the car is involved in an accident beyond repair, your collision insurance coverage will help you pay $19,000 which is the cash value of the car. If you don’t have gap insurance policy in place, it means that you will need to pay the $3,000 balance out of your pocket in order to fully pay the loan balance. But if you have gap insurance, it will will help you pay the $3,000, which is the difference between your auto loan and the cash value of the car. This means you will not need to pay this by yourself. However, if you have deductible of $500 on your car insurance policy, the insurance company will only reimburse you $18,500. If your gap insurance covers deductibles, it will reimburse you $3,500. But if it doesn’t, you will be the one to pay the deductible of $500 out of pocket while the gap insurance will only cover $3,000

Regarding the covered events, gap insurance covers almost everything that is covered under collision and comprehensive insurance. Covered events include accidents, fire, theft, vandalism and other disasters such as flood, hurricane and tornado which can result to total loss of the car.

Read Also: 15 Factors Affecting Car Insurance Premium

What Gap Insurance Does Not Cover

Every insurance policy usually has its own exclusions. Therefore, gap insurance is without an exception. There are certain things or events that guaranteed auto protection insurance will not cover and this include the following:

• Bodily injury: If you or other person is injured in the accident which you are the one at fault, gap insurance does not cover bodily injury, medical or any on the spot expenses you might incur whether for yourself or the other party. Also, if the accident result to death, gap insurance will not cover the funeral expenses. Your liability or comprehensive insurance policy will take care of bodily injury liability.
• Property damage: You should understand that guaranteed auto protection insurance does not cover the cost of repairing the other person’s property that you might damage in an auto accident. If you have liability or comprehensive car insurance, your insurance company will pay for the property damage liability.
• Cars without collision and comprehensive insurance: Based on what I have been saying, I want to believe that you understand that guaranteed auto protection insurance will only pay for the gap between your car loan and the cash value of your car. Therefore, it is expected that anybody that wants to purchase gap insurance must have collision and comprehensive insurance in place which will be able to pay for the cash value of your car if it is totalled. If you fail to renew your collision and comprehensive insurance, it means there is no policy for your car. You might as well lose your gap insurance policy.
• Custom installed equipment: Guaranteed auto protection insurance does not cover any custom equipment that you installed in the car which is not part of the original car manufacturer’s design.
• Overdue loan payment: Gap insurance is not an excuse for not sticking to your auto loan repayment agreement. If you have overdue amount as part of your loan balance or any financial penalties on your leased car, you need to be informed that gap insurance does not cover such overdue loan payment nor will it help you pay the penalties.
• Repairs to your car: Gap insurance does not cover repairs to your car. Guaranteed auto protection insurance will only be helpful if your car is totalled and the value of the car is less than your outstanding car loan.
• Loan down payment: When you applied for your auto loan, you may be required to make certain down payment. Subsequently, after the loan has been approved, you will be paying back the loan gradually based on the repayment terms. Gap insurance does not cover the amount you have paid on the loan.
• Money rolled over into the new auto loan: This includes carry-over balances on any loans you rolled over into your new auto loan

Please note that the list may not be exhaustive. You need to ask your insurer what their gap insurance covers and what it does not cover.

Read Also: Car Insurance: What Liability Insurance Covers

Who needs GAP insurance?

In case you are still confused and you are thinking whether you really need guaranteed auto protection insurance or not, the tips given below will help you decide whether it will be useful to you. Below are some instances when guaranteed auto protection insurance may be useful:

• Leased car: If your car is financed, gap insurance may not be an option for you. The financial institution that financed your car may make it mandatory for you to buy the policy in addition to your collision and comprehensive insurance. This is to ensure that the financial institution has adequate security to protect itself in the event that the car is totaled in an accident. The lender is guaranteed the full loan balance.
• Down payment on your loan is low: If your down payment is less than 20 per cent, it means that you will be owing significantly large loan amount compared to the value of the car. You may not see this as a problem as long as you are able to keep to the loan repayment term. But if the car is totaled, the gap between your loan balance and the cash value of the car may be too wide. This can make it difficult if not impossible for you to pay out of pocket. But gap insurance can help you bridge the gap.
• High Interest rate: If you have bad credit, you may find it difficult locating lenders that will be willing to lend you loans. You have few options when it comes to shopping around for cheap auto loans. You may end up getting the loan at a very high interest rate because of the limited options which you have. The effect of high interest rate is that, the loan becomes too expensive. Chunk of your repayment amount will be going to servicing the interest on the loan while you are only scratching the surface of the loan principal. In such situation, it may be necessary to buy gap insurance.
• High depreciation rate: If you buy the type of car that depreciates very fast, the car will soon lose its value. For instance, if you look around, you will notice certain cars that were in vogue about two years ago. But today, if people see you driving the car, they see it as outdated. Such car may still appear new but they may no longer have good resale value. If you buy such a car, gap insurance will be very relevant.
• Use of the car: If you will be driving your car in very long trips, two things may happen. There is possibility of getting involved in an accident. The longer you stay on the roads, the less energetic you are. Just a short doze while driving can result in an accident. Secondly, driving your car in a long distance causes your car to wear and tear very fast. This can reduce the cash value of the vehicle. Therefore, the cash value of the car may not be able to cover your car loan if the car is totaled.
• Loan terms: If your loan is going to take like five years and above to repay, it means that your monthly installment will be low. With low repayment amount, you will realize that you are merely paying small portion of your loan principal. By the time your car is already five years old, the cash value must have gone down dramatically. Unfortunately, your loan balance may still be high as a result of the long terms set for your loan repayment which implies that you will only need to make small payment on the loan every month. This may make it necessary to have guaranteed auto protection insurance in place.
• Insufficient cash savings: If you know that you don’t have enough cash in your savings account from which you can conveniently pay for the gap between your loan balance and the reimbursement for the cash value of your car that you will get from your car insurer, gap insurance may be desirable.

So, you may like to ask yourself the question again. Is gap insurance worth the money? From the above points, you will be in a better position to decide. However, if you bought your car in cash, that is, your car is not financed, gap insurance may not be necessary for you. On the other hand, if your car is financed but you made a huge down payment or you have significantly paid down the loan to the extent that the loan balance is the same or lower than the cash value of your car, you don’t need to buy guaranteed auto protection insurance again. Even you may choose not to buy gap insurance if you know that you can conveniently pay for any shortfall between what your loan balance is and the amount you will receive from your car insurer as cash value of your car. With all these explanations, if you still don’t know whether guaranteed auto protection insurance is good for you, I will suggest that you contact your insurance agent.

Read Also: How to Get Really Cheap Car Insurance Quotes

Where you can buy gap insurance

You can buy guaranteed auto protection insurance from three main sources. You can buy the policy from car dealership, financial institution and insurance company. If your car is financed, there is tendency that gap insurance is already part of your loans agreement. Try to read your loan terms to know if your car is already covered so that you don’t need to duplicate the policy.

On the other hand, you can choose to buy guaranteed auto protection insurance as add on from your car insurer. Buying all your insurance needs from one company may make you to enjoy certain discount. If your insurer does not offer this product, you can buy it from a stand-alone gap insurance provider.

Nevertheless, some people still prefer buying their guaranteed auto protection insurance from car dealership due to certain benefits they tend to enjoy. If you buy your gap insurance policy from insurance company, some of them will require that you pay your deductible. That is, they may not necessarily cover deductible. But with dealership, you don’t need to pay deductible. Also, car insurance companies usually calculate the premium that you pay for guaranteed auto protection insurance premium as a percentage of what you paid for your collision and comprehensive insurance. This means that if your car insurance rate is high, this will impact what you pay as guaranteed auto protection insurance premium. One of the reasons why your car insurance rate may increase is when you file many claims. In the case of dealership, the number of claims you file does not impact your gap insurance premium neither do you face risk of policy cancellation.

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In conclusion, gap insurance is optional but it may be a good policy to have especially when you know that your situations demand that you have it. The extra amount you may need to pay as premium will give you peace of mind. You will be confident that if the worst happens which may require that your car is totalled, you will be able to pay off your loan balance without needing to dip your hand into your savings. Don’t forget that you can shop around for gap insurance providers just the same way you shop around for car insurance companies. This will allow you to compare quotes and their ratings.

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