Understanding Gap Auto Insurance: Filling The Void In Coverage

Guaranteed Asset Protection (GAP) insurance is an optional add-on to your car insurance policy that can provide crucial financial protection. GAP insurance covers the difference between the amount you owe on your car and its depreciated value if your car is stolen or declared a total loss. This type of insurance is especially useful if you owe more on your car than its market value, as it can help you avoid being left with an outstanding loan that exceeds the car's value. GAP insurance typically applies only to brand new vehicles or models less than a year old, and it does not cover accidents, repairs, or a sale or trade-in. It is generally recommended for drivers who have financed or leased a new or nearly new vehicle and have a high loan-to-value ratio.

When to skip GAP coverage

You can skip GAP insurance if you made a down payment of at least 20% on the car when you bought it. This means there is little chance of you owing more than the car's value, even in the first year or so of ownership. In this case, you won't need GAP insurance to bridge the gap between the car's value and the loan amount owed.

If you plan to pay off your car loan in less than five years, you may not need GAP coverage. The longer the loan period, the more likely it is that the car's value will depreciate faster than the loan amount owed, creating a "gap". With a shorter loan period, you reduce the risk of owing more than the car's value.

If your vehicle is a make and model that historically holds its value better than average, you may not need GAP insurance. Some cars depreciate at a slower rate, so the gap between the car's value and the loan amount owed may not be significant. Checking guides like the National Automobile Dealers Association (NADA) or Kelley Blue Book can help you determine your car's value and decide if GAP insurance is necessary.

Additionally, if you have paid off your loan early or sold the vehicle, it's advisable to cancel your GAP insurance policy. GAP insurance is intended to cover the gap between the car's value and the loan amount, so once the loan is no longer a factor, the coverage becomes unnecessary.

When GAP insurance doesn't pay out

GAP insurance, or guaranteed asset protection, covers the difference between the vehicle's actual cash value and what you still owe on the loan in the event of a total loss. However, there are certain situations in which GAP insurance will not pay out:

• The car is not a total loss: GAP insurance will not cover any damage that is not a total loss. It is important to note that GAP insurance is only applicable if the car is deemed a total loss, and it does not cover normal maintenance or repairs after a car accident.
• The claim is over the limit: GAP insurance policies may have a limit on the claim amount, usually a percentage of the vehicle's value. If the claim exceeds this limit, the policy will not cover the full amount.
• Non-payment of policy premiums: If the policy premiums have not been paid and the policy has lapsed when the total loss occurs, the GAP insurance will not provide any coverage.
• Fraud or misrepresentation: If there is any fraud or misrepresentation in the insurance claim, the GAP insurance company may deny the claim and not provide any coverage.
• Violation of car loan or lease agreement: If the policyholder has violated the terms of their car loan or lease agreement, such as failing to make payments or not having the proper coverage, the GAP insurance policy may not pay out.
• Waiting period before coverage: GAP insurance policies typically have a waiting period before coverage begins. During this waiting period, the policyholder would not be covered for a total loss.

It is important to carefully review the terms and conditions of the GAP insurance policy to understand the specific circumstances under which the coverage may not be provided.

Who is eligible for GAP insurance?

GAP insurance, or guaranteed asset protection, is optional coverage that can help you cover the difference between what your insurance covers and the amount you owe on your auto loan in the event that your car is damaged, stolen or declared a total loss. It is designed for drivers who are "upside down" on their car loan, meaning they owe more than their car is worth.

You may want to consider GAP insurance if you are in one of the following situations:

• You made a small down payment or no down payment at all: If you didn't make a substantial down payment, there's a chance you were upside down soon after you bought the car. New cars depreciate quickly — they can lose 25% or more of their value in the first year alone.
• You chose a long loan term: When you spread your car loan payments over a long period, it also takes longer to build equity. If you financed your car for 5 years or longer, you may want to consider GAP insurance.
• Your car make and model depreciates quickly: Some cars depreciate more quickly than others. If you're buying one of those vehicles, buying a GAP insurance policy could be a smart move.
• You plan to put a lot of miles on your car: The faster you put miles on your car, the faster it will depreciate. If you think you'll put a lot of miles on your car each year, the resulting increase in annual depreciation may make GAP insurance a good decision.
• You're leasing the car: GAP insurance may be required if you're leasing. It's often included in your lease agreement — in some cases, it's included for free, and in others, it's an optional feature you can buy for an added charge.
• You owe more on your car loan than the car is worth: If you are currently making car loan payments, be sure to calculate the loan balance and weigh it against your car's current cash value. If there is a gap, you should strongly consider GAP insurance.
• Your car loan requires GAP insurance: Regardless of what you owe on your loan, some loan providers require GAP insurance from the outset of your loan.
• Your lease requires GAP insurance: Many auto leases require GAP insurance as a protective measure. Some lease providers may already include GAP insurance in the price of the lease.

In general, most new car buyers typically benefit from GAP coverage while the vehicle is less than three model years old.

Where to buy GAP insurance

When it comes to buying GAP insurance, you have a few options. You can either buy it from a dealership or an insurance company. It's worth noting that some car insurance companies, like Geico, do not offer GAP insurance.

Buying GAP Insurance from a Dealership

When you buy or lease a car, the dealer will likely ask if you want to purchase GAP insurance when you discuss your financing options. Buying GAP insurance from a dealer can be more expensive if the cost of the coverage is bundled into your loan amount, which means you'd be paying interest on your GAP coverage.

Buying GAP Insurance from an Insurance Company

You can typically add GAP coverage to an existing car insurance policy or a new policy, as long as your loan or lease hasn't been paid off. Buying GAP insurance from an insurance company may be less expensive, and you won't pay interest on your coverage. If you already have car insurance, you can check with your current insurer to determine how much it would cost to add GAP coverage to your existing policy. Note that you need comprehensive and collision coverage in order to add GAP coverage to a car insurance policy.

GAP Insurance Providers

• Allstate
• Liberty Mutual
• Nationwide
• Progressive
• Travelers
• The Hartford

Is GAP insurance worth it?

GAP insurance is a type of supplemental coverage that can be added to your comprehensive and collision insurance. It covers the difference between your car's actual cash value and the amount you currently owe on your loan or lease if your car is stolen or totaled in an accident. This type of insurance is particularly useful if you owe more on your car than it is worth, as standard auto insurance will only cover the depreciated value of your car at the time of the claim.

GAP insurance may be worth it if one or more of the following situations apply:

• You owe more on your auto loan than your car is worth.
• You made a small down payment or no down payment for your car.
• You took out a loan with a term longer than two years.
• You drive more than the average person in your area.
• You are leasing your car.
• Your car depreciates faster than other cars (e.g. luxury sedans).

GAP insurance may not be necessary if any of the following apply:

• You made a down payment of at least 20% of the car's value at the time of purchase.
• You expect to pay off your car loan in less than five years.
• You financed or leased a vehicle that holds its value.
• You paid cash for your car.
• You got a great deal on your vehicle and it's worth more than you owe.

The cost of GAP insurance depends on various factors, including the insurance provider, your credit score, the value of your vehicle, and how much you owe to the lender. It can be purchased from a dealership or lender, or added to your existing insurance policy through an insurance provider. Dealerships typically charge a premium for GAP insurance, while insurance providers may offer it as an add-on for a flat rate of around $20 per year.

Alternatives to GAP insurance

If you are unsure about the value of GAP insurance, there are alternative options to consider:

• Put down a larger down payment of at least 20% when purchasing your vehicle.
• Upgrade to a comprehensive insurance policy that includes GAP coverage or new car replacement coverage.
• Inquire about loan or lease payoff insurance, which is similar to GAP insurance but may be available for used cars.
• Research vehicles before buying to ensure you are paying a fair price.

Frequently asked questions