Gap Insurance Drugs: When To Hit The Mark

In 2024, you will hit the coverage gap for gap insurance drugs when you and your insurance company have paid $5,030 for your medications during the year. This is known as the 'donut hole' or 'coverage gap' and it means that there is a temporary limit on what the drug plan will cover for drugs. Once you have paid $5,030, you will be responsible for 25% of the cost of your drugs. You will stay in the gap until you have spent $8,000 out of your own pocket for covered drugs during the year.

What is gap insurance?

Gap insurance, or Guaranteed Asset Protection insurance, is an optional form of financial protection for drivers. It covers the difference between the amount owed on a car loan and the car's actual cash value in the event of a total loss. This can include situations where the car is stolen or damaged in an accident.

When you buy 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 the first year. Standard auto insurance policies only cover the depreciated or current market value of the car at the time of a claim. This means that if your new car is badly damaged or totaled, you could be left with a gap between the amount your insurance pays out and the amount you still owe on the loan.

For example, imagine you have a three-year-old car that's been totaled in an accident. The actual cash value of the car is $20,000, but you still owe $25,000 in payments. Gap insurance will cover this $5,000 gap (minus your deductible).

Gap insurance is typically available for brand-new vehicles or models less than three years old. It's important to note that gap insurance is different from new car replacement coverage, which helps drivers obtain a new version of their damaged vehicle. Gap insurance does not cover the purchase of a new vehicle.

In summary, gap insurance is designed to protect drivers from financial loss if their car is stolen or totaled, ensuring they don't have to pay out of pocket to cover the gap between the insurance payout and the remaining loan balance.

When do you need it?

You need gap insurance when the amount you owe on your car is significantly more than its value, and you wouldn't be able to afford to pay the difference if your car was stolen or written off.

For example, if you have a $30,000 car loan on a car currently worth $22,000, you may not be able to afford to pay the $8,000 gap if your car is stolen or written off. In this case, you may decide you need gap insurance.

Gap insurance is also required by some lenders or leasing companies. It helps protect them from car owners who walk away from a loan or lease if the car is stolen or written off.

You must have collision and comprehensive insurance in order to buy gap coverage.

Gap insurance is not needed when the amount you owe is less than the car's value, or only slightly more. Once the amount you owe is less than the car's value, there's no reason to keep gap insurance as there will be little or no gap insurance payout possible.

For example, if you owe $15,000 and your car's value is $17,000, there won't be a gap if your car is stolen or written off.

You should also cancel your gap insurance if you sell your car.

What does gap insurance cover?

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 totaled. This type of insurance is designed for people who finance or lease their vehicles.

If your car is stolen or totaled, GAP insurance will cover the difference between your car's actual value and your outstanding lease or loan balance. For example, if you finance a $25,000 car and it is in an accident and declared a total loss by an insurance adjuster, your collision or comprehensive insurance will cover the loss. If the insurance adjuster determines that the actual cash value of your car is $20,000, but your loan balance is $24,000, you will owe more on your loan than the car is worth. In this case, GAP insurance would cover the remaining $4,000 that you would otherwise have to pay out of pocket.

GAP insurance only covers you if your vehicle is totaled or damaged and you owe more on your loan than the car is valued at when the incident happens. You can file a GAP insurance claim if your car was stolen or if it was totaled in an accident. It is important to note that GAP insurance does not cover costs related to vehicle repairs, personal injuries, or other accident-related expenses. It also does not cover your deductible, the amount your insurance subtracts from a claim payout.

What does gap insurance not cover?

Gap insurance is a form of financial protection for drivers whose cars are totalled or stolen and are worth less than the amount owed on their car loan or lease. However, there are certain situations in which gap insurance does not apply.

Firstly, gap insurance does not cover your car insurance deductible. This is the amount your insurance subtracts from a claim payout. For example, if you have a $3,000 gap after your collision insurance pays out and a $500 collision deductible, gap insurance will only pay $2,500, leaving you to cover the remaining $500.

Secondly, gap insurance does not cover overdue payments and late fees on your car loan or lease. It also does not cover extended warranties, carry-over balances from previous loans or leases, lease penalties for high mileage or excessive use, or charges for credit insurance connected to the loan.

Additionally, gap insurance will not cover the down payment for a new car. It is also important to note that gap insurance only applies if you have collision and comprehensive insurance, which are typically required when buying or leasing a new vehicle.

Finally, gap insurance will not cover mechanical issues or repairs, such as engine or transmission failure. It also does not cover death, injuries, or funeral costs. These situations would be covered by the liability portion of a car insurance policy or personal injury protection.

Where can you buy it?

Gap insurance can be purchased from several sources, including insurance companies, car dealerships, auto loan lenders, banks, credit unions, or specialised providers. It is typically cheaper to buy gap insurance from an insurance company than a car dealer or lender. Some insurance companies offer gap insurance as an add-on to an existing policy, while others sell it as a standalone policy.

When buying a car, the dealer will likely offer gap insurance as part of the financing options. However, it is usually more expensive to buy gap insurance from a dealer as the cost of coverage is bundled into the loan amount, resulting in interest payments on the gap coverage.

Several major auto insurers offer gap insurance, including State Farm, Nationwide, Progressive, Allstate, USAA, AAA, and Esurance. Progressive, for example, offers "loan/lease payoff coverage," which functions similarly to gap insurance but is limited to a maximum payout of 25% of the vehicle's value.

It is also possible to buy gap insurance online if you do not have an existing auto insurance policy or if your current insurer does not offer gap coverage. Buying gap insurance online allows for convenient comparison shopping and can help find the most affordable policy.

In summary, while gap insurance is available from various sources, purchasing it from an insurance company or online tends to be more cost-effective than buying it from a car dealer or lender.

Frequently asked questions