Gap Insurance: Claiming And Collecting

Gap insurance, or guaranteed asset protection, is an optional form of auto insurance that covers the difference between the amount owed on a car loan or lease and the vehicle's market value in the event of an accident or theft. This type of insurance is typically purchased when there is a significant gap between the car's value and the amount owed, which can occur when a small down payment is made, the vehicle is leased, or the financing term is long. Gap insurance can be purchased from car dealers or auto insurance companies, with the latter often being a more cost-effective option as it avoids paying interest on the insurance. It's important to note that gap insurance is not required by any insurer or state, but some leasing companies may mandate it.

When to buy gap insurance

Gap insurance is not a requirement by state law, but it may be required by lenders and lessors. It is worth buying gap insurance when you are in one of the following situations:

• You have a car that depreciates in value quickly, like a sports car or an electric vehicle.
• You made a low down payment (less than 20%, for example) on a large loan.
• You have a long-term loan (for example, a term that is 60 months or longer).
• You carried over negative equity from a past car loan into your current car loan.

You can buy gap insurance from your car insurance company, loan provider, or dealership. It is recommended to buy gap insurance from your car insurance company as it is cheaper than buying it from a dealership. Dealerships and banks charge a lump sum of up to $700 for gap insurance, whereas car insurance companies charge as little as $3 per month for coverage.

Where to buy gap insurance

When buying a new car, you can get gap insurance from either the dealer or your auto insurance company. While gap insurance is usually optional if you're financing a purchase, it may be mandatory if you're leasing a vehicle.

Buying gap insurance from a dealer

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. However, buying gap insurance from a dealer can be more expensive if the cost of the coverage is bundled into your loan amount, resulting in interest payments on your gap coverage.

Buying gap insurance from an auto insurer

You can typically add gap coverage to an existing car insurance policy or a new policy, provided your loan or lease hasn't been paid off. Purchasing gap insurance from an insurance company may be more cost-effective, and you won't pay interest on your coverage. If you already have car insurance, check with your current insurer to determine the cost of adding gap coverage to your existing policy. Note that comprehensive and collision coverage are usually prerequisites for adding gap coverage to a car insurance policy.

Several insurance companies and financial institutions offer gap insurance. In Texas, for example, providers include Associated Credit Union of Texas, Allstate, Greater Texas Credit Union, USAA, and Texas DPS Credit Union. Outside of Texas, Progressive, State Farm, and Travelers are known to offer gap insurance.

Credit unions are also worth considering for gap insurance, as they often provide competitive rates and may even shop around on your behalf as a free service for members.

How gap insurance works

Gap insurance is an optional auto insurance coverage that applies if your car is stolen or deemed a total loss. It covers the difference between what a vehicle is currently worth (which your standard insurance will pay) and the amount you actually owe on it. This is especially important when you owe more on your car loan than the car is worth.

When you buy or lease a new car, it starts to depreciate in value as soon as it leaves the car lot. Most cars lose 20% of their value within a year. Standard auto insurance policies cover the depreciated value of a car, which is the current market value of the vehicle at the time of a claim. However, in the early years of ownership, the amount of the loan may exceed the market value of the vehicle itself, leaving a "gap".

Gap insurance covers this difference between the depreciated value of the car and the amount you still owe on it. For example, if you owe $25,000 on your loan and your car is only worth $20,000, gap insurance will cover the $5,000 gap, minus your deductible.

You can typically buy gap insurance from car insurance companies, banks, and credit unions. It is also sometimes offered by car dealers, although this can be more expensive as the cost of the coverage is often bundled into your loan amount, resulting in interest payments on your gap coverage.

To qualify for gap insurance, you must have comprehensive and collision coverage on your policy. Gap insurance is typically optional if you're financing a car purchase, but it may be required if you're leasing a vehicle.

What does gap insurance cover?

Guaranteed Asset Protection (GAP) insurance, or simply gap insurance, covers the difference between the amount you owe on your auto loan and the amount the insurance company pays if your car is stolen or totaled. This type of insurance is designed for people who finance or lease their vehicles. It is important to note that gap insurance does not cover costs related to vehicle repairs, personal injuries, or other accident-related expenses. It only covers the remaining balance on your loan if your car is stolen or totaled and your car is worth less than what you owe.

When you buy a new car, it starts to depreciate in value immediately. Most cars lose 20% of their value within the first year. Standard auto insurance policies cover the depreciated value of a car, which is the current market value of the vehicle at the time of a claim. However, in the early years of ownership, the amount of the loan may exceed the market value of the vehicle. This is where gap insurance comes in. It covers the difference between what the vehicle is currently worth (which your standard insurance will pay) and the amount you owe on it.

For example, let's say you finance a $25,000 car. A few months after purchasing it, your car is in an accident and the insurance adjuster declares it a total loss. Your collision or comprehensive insurance will cover the loss, depending on the nature of the damage. The insurance adjuster determines that the actual cash value of your car is $20,000, but your loan balance is $24,000. In this case, you owe more on your loan than the car is worth, and you would be responsible for paying off the entire loan. A gap insurance policy would cover the remaining $4,000 that you would otherwise have to pay out of pocket.

Gap insurance is typically offered by car dealers and auto insurance companies. It is often included in the financing agreement, especially for leasing. Dealerships usually charge a flat rate of $400 to $700 for gap insurance. However, purchasing gap insurance from an insurance company may be a more affordable option, as it will only increase your annual premium by about $20 on average.

When to cancel gap insurance

Gap insurance is not a legal requirement and can be cancelled at any time. However, there are certain instances when it makes financial sense to cancel your policy.

A good time to cancel gap insurance is when the remaining balance of your loan is less than the book value of your car. This is the amount you paid for the car minus its depreciated value over time. Gap insurance is only valuable when you owe more than what the car is worth. So, if your car's value is greater than the remaining loan balance, you’re essentially paying for coverage that you will never use, even if your car is stolen or totalled.

You may also want to cancel your gap insurance if you paid too much for coverage, decide to sell your car, or need to lower your insurance premiums to save money.

If you cancel before the end of a policy term, you can request a refund for unused coverage. However, you will need to check your policy for any cancellation fees, as these can be as high as 50% of your premium if you cancel within 60 days of taking out the policy.

If you have paid your gap insurance premium upfront, you may receive a refund when you cancel your policy. This refund will be prorated based on how long you had the coverage in place. If you pay monthly, you may get a smaller refund if you cancel the policy early in the month.

To cancel your gap insurance, review your policy, then get an odometer disclosure statement to verify your car's mileage. Once you have submitted the odometer disclosure statement, you can ask your gap insurance company for the gap insurance cancellation forms. After filling out all the necessary paperwork, submit the documents to your agent or insurance company. Once they have reviewed the documents and verified the odometer disclosure statement, the carrier will determine how much of a gap insurance refund you are owed.

Frequently asked questions