Gap Insurance: Protecting Car Buyers

Guaranteed Asset Protection (GAP) insurance is an optional add-on product that covers the difference between the amount owed on an auto loan and the amount the insurance company pays in the event of theft or damage. Standard auto insurance policies cover the depreciated value of a car, which is often less than the amount owed on a loan. GAP insurance is intended to cover this difference, protecting consumers from financial loss. GAP insurance is typically available for new vehicles or models less than three years old and can be purchased from dealerships or insurance companies, with the latter often being the cheaper option.

When to consider buying gap insurance

Gap insurance is an optional type of car insurance that covers the "gap" between what a car is worth and what the driver owes on their auto loan or lease if the car is totaled or stolen. It is worth considering buying gap insurance if you are in any 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 lease a vehicle.

Gap insurance is not required by state law, but it may be required by lenders and lessors. It is an affordable way to protect yourself from the risk of a big expense if your car is totaled or stolen. However, if you have already paid off most of the loan balance, made a significant down payment, or could pay for the gap yourself, then gap insurance is likely not worth it.

How gap insurance works

Gap insurance, or guaranteed asset protection, is an optional add-on product that covers the difference between the amount you owe on your auto loan and the amount your insurance company pays if your car is stolen or deemed a total loss. It is important to note that gap insurance only comes into play when the amount you owe on your car loan is more than the value of your vehicle.

Here's how gap insurance works:

Let's say you buy a new car worth $30,000. Over time, due to depreciation, the value of your car decreases to $20,000, but you still owe $25,000 on your loan. If your car is stolen or totalled in an accident, your comprehensive or collision insurance will pay the actual cash value (ACV) of your vehicle, minus your deductible. Without gap insurance, you would only receive $20,000 (minus your deductible) from your insurance company, leaving you with a $5,000 gap.

This is where gap insurance comes in. Gap insurance covers this $5,000 difference, ensuring that you don't owe any money on a totalled car. In this example, with gap insurance, you would receive the extra $5,000 needed to pay off your loan, minus your deductible.

It's important to note that gap insurance doesn't cover your deductible, additional charges related to your loan (such as finance or excess mileage charges), engine failure, or other repairs. Additionally, gap insurance is not required and can be cancelled once your loan amount is less than the value of your car.

When considering gap insurance, it's recommended to buy it through your auto insurer rather than a dealership to avoid paying interest on the insurance cost.

Cost of gap insurance

The cost of gap insurance depends on a variety of factors, including your state, driving record, vehicle, and age. It is generally recommended to compare prices from different providers before purchasing a policy.

Gap insurance is typically offered by car dealerships and traditional insurance companies. Dealerships tend to charge more for gap insurance than insurance companies, with prices ranging from $20 to $60 per year on average. Some sources state that insurance agencies can provide cheaper rates because commissions on this type of insurance are not regulated.

It is worth noting that gap insurance can also be purchased as an endorsement on an existing car insurance policy or as separate coverage from a dealer. Comparing the costs of both options can help determine the best option for your needs.

Gap insurance and car leasing

Gap insurance, or Guaranteed Asset Protection insurance, is designed to protect you financially when you lease or buy a new car. It covers the difference between what your car insurer pays out and the actual value of your car in the event of it being written off due to an accident, theft, or flood. While gap insurance is not a necessity, it can provide valuable peace of mind and financial protection during the lease period.

When you lease a car, you are responsible for insuring it from the first day of the contract to the last. This insurance must be comprehensive, not just third-party. Setting up insurance for a leased vehicle is similar to any other car, except you need to inform the insurer that it is a lease vehicle.

Gap insurance is particularly useful when leasing a car because, in the event of a write-off or theft, your insurer will only pay out the current market value, which is likely to be less than what you still owe to the leasing company. With gap insurance, you can pay off the cost of the car in full and not be left out of pocket.

There are several types of gap insurance available, including:

• Agreed value gap insurance: Pays the difference between the insurance settlement and the Glass Guide value when the gap insurance was taken out.
• Back-to-invoice gap insurance: Pays the difference between the insurance payout and the invoice price.
• Contract hire gap insurance: Pays the shortfall between the insurance payout and the residual value, as well as any early cancellation fees.
• Vehicle replacement plus gap insurance: Covers the difference between the insurance payout and the cost of replacing the vehicle with a similar age and mileage car.

Gap insurance typically must be taken out within the first 180 days of receiving the car. It is available from dealerships and specialist brokers, with prices ranging from £69 to £300 for three years of cover. When purchasing gap insurance, it is important to compare prices and read the fine print to ensure you understand what is and isn't covered.

When gap insurance doesn't pay

Guaranteed Asset Protection (GAP) insurance is an optional product that 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 totalled. Standard auto insurance only pays an amount up to the value of your vehicle. GAP insurance is supposed to cover the loss you would suffer if your loan balance is higher than the value of the vehicle.

There are a few reasons why GAP insurance won't pay out:

• The damage is not a total loss: GAP insurance only pays out if your car is totalled or stolen, and you owe more than it's worth. It does not cover repairs or maintenance after an accident.
• The claim is over the limit: Some GAP insurance policies have a limit on the amount of the claim, usually a percentage of the vehicle's value.
• Policy premiums haven't been paid: If the policy has lapsed due to non-payment when the total loss occurs, the policy will not pay out.
• Fraud or misrepresentation: If there is any fraud or misrepresentation involved in the claim, the GAP insurance company can deny the claim.
• The claim isn’t covered by the policy: GAP insurance policies typically have a waiting period before coverage begins, and if the total loss occurs during this period, the policy won't pay out.

It's important to carefully review the terms and conditions of your GAP insurance policy to understand the specific circumstances under which it will and will not pay out.

Frequently asked questions