Guaranteed Asset Protection (GAP) insurance is a policy designed to cover car owners when the loan amount is higher than the price of the car. For instance, when the car is worth $20,000 but the loan amounts to $25,000, GAP insurance covers the extra $5,000 if the car is stolen or totaled. GAP coverage should not be confused with a typical auto insurance policy. If a vehicle is totaled before the loan has been repaid in full, the amount usually becomes significantly higher than the value of the car that is no longer of use, which is when GAP insurance covers you against financial loss. Read on to find out if GAP insurance is worth it for a car owner.
According to the Insurance Information Institute, there are several situations where GAP insurance could be necessary.
- Low down payment: If a new car is purchased with a down payment of 20% or less, then it could lose value faster than the loan is paid off.
- Long financing period: If a new car is financed for 60 months or more, then the loan may still be high after the car has lost much of its value.
- Car lease: If a car is leased instead of purchased, then GAP insurance is important to obtain and may even be required for the lease.
- Cars with fast depreciation: Some cars tend to lose value faster than others. Researching a new car before purchasing it will help to determine how it retains value.
- Rolled-over loan: When purchasing a new car while paying off an old car loan, the negative equity will be rolled over, which increases the loan amount on the new car.
How GAP Insurance works?
If a new car is damaged to the point where it is considered a “total loss,” then full coverage auto insurance might not be enough to cover the car loan. In this case, GAP insurance would come into play.
When a financed or leased car is badly damaged or totaled in an accident, the owner will probably owe more than the car is worth. Collision or comprehensive coverage will pay for the car’s actual cash value, and GAP insurance will cover the remaining amount of the car loan.
Where can you get GAP Insurance?
GAP insurance can be purchased from three different providers. Dealerships usually offer it when people buy a new car, and many auto insurance companies offer GAP insurance, as well. There are even companies who specialize in GAP insurance.
Although GAP insurance is offered at dealerships, insurance providers generally provide lower rates. According to the Insurance Information Institute, GAP insurance, when added to a full coverage policy, only increases the annual premium by $20 on average.
Just like auto insurance, it’s a good idea to shop around for a few GAP insurance quotes before settling on a provider.
What’s the Difference between Gap and New Car Replacement Coverage?
In many instances, car owners confuse new car replacement coverage with GAP insurance. While the former is meant to help you buy a new car, the latter is there to help you pay off your stolen or totaled car. A new car replacement policy will not cover you against an outstanding loan amount from your old car, whereas GAP insurance will not assist you with buying a new vehicle to replace the one that’s gone.
While both of these options are beneficial under respective circumstances, it isn’t necessary for a car owner to have GAP insurance as well as new car replacement coverage. When trying to decide between the two choices, consider the following:
- Compare the cost of GAP insurance and new car replacement coverage by getting quotes from various insurers. If your loan amount is higher than the price of your car, then GAP insurance is a wiser choice.
- GAP insurance usually covers more years than a new car replacement policy, which is advantageous when you have a loan.
- If you choose new car replacement insurance, don’t forget to cancel it once your vehicle exceeds the specified age limit or mileage to avoid paying towards expired insurance coverage.
Where Can You Get Gap Insurance?
A few major auto insurance companies offer GAP insurance. If you have an auto insurance policy, it might be beneficial to ask your current provider about GAP coverage options. Some of the companies that offer GAP insurance include:
- AAA: Waives up to $1,000 deductible for insured vehicles at an affordable rate, with free towing in case of damage.
- Allstate: Offers coverage for cars worth $50,000 or less, with up to a $1,000 deductible.
- American Family: Called Loan or Lease Assistance Coverage by the company, the policy covers up to 25% of the car’s value.
- Nationwide: Offers coverage but does not waive deductible, and details are not readily available online.
- Progressive: Covers up to 25% of the actual value of the vehicle, and it can be bundled with auto insurance starting at $5 a month.
- State Farm: Called Payoff Protector, the coverage is bundled with the auto insurance policy.
- Travelers: Offers loan/lease GAP insurance for the original owner of a vehicle bought from a new car dealer. Used vehicles don’t qualify.
You may also purchase GAP insurance from your car dealership, but this option might cost you more because the insurance amount is often added to your principal. Combining this policy to your existing auto insurance could save you more money.
Frequently Asked Questions
How much does gap insurance cost?
Although the Insurance Information Institute estimates that GAP insurance only costs an average of $20 more on full coverage auto policies, the actual cost of GAP insurance will change from person to person. The driver’s age, state location and previous insurance claims will all factor into the cost, as well as the car’s actual cash value.
How do I get the best deal on gap insurance?
The best deal on GAP insurance will probably come from the driver’s auto insurance provider, because the insurance will not need to be purchased separately. Instead, it will be added on to the driver’s existing auto policy. If you decide to do it separately, the best way to find the best deal is to get quotes from different companies to compare.
Do you get money back from gap insurance?
If the GAP insurance premiums have been paid for the full loan term, but the loan is paid off early, then the driver may be issued a GAP refund of the remaining premium amount.
What does GAP insurance exclude?
Just like auto insurance, GAP insurance will only pay for perils included in the policy—and these perils can change from policy to policy. Before signing up for GAP insurance, check the coverage details to find out what is excluded.