What is Gap Insurance and What Does it Cover

  • new-car

You are in the dealer’s office and get the paperwork for your new car. There is a stack of papers and did not care much that you agreed for Gap insurance. Did you really need gap insurance or could it have been refused? With more car dealers and leasing companies trying to sell Gap insurance, it is high time that we understood what it meant.

Why Do You Need Gap Insurance

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Gap insurance would be apt for a new expensive vehicle. The market value of the car starts to reduce as soon as you begin to drive the car. GAP or Guaranteed Auto Protection is a type of coverage that pays for the difference in value between the current market rate of your car and the amount you owe on it. This could be added to an auto insurance policy or purchased separately.

When you buy a new car, it could be a big investment for you. As soon as you drive it out of the lot, it changed from ‘new’ to ‘used’ and its value starts to depreciate. In the event of a claim when your car gets totaled, the insurance may pay out as per the market value to replace the car. This amount could be less than what you have to pay for the outstanding loan amount of the car. Gap Insurance will help to pay for this difference amount.

It is recommended to get Gap Insurance in the following situations

  • If you finance or lease a car rather than pay in total. You do not own the car and owe the money. This amount could be big or small based on the type of car you buy.
  • In case you have financed a new car for a term of 5 years or more. With each year, the car is aging and depreciating in value. The outstanding amount on your car loan may be much more than what you could receive as replacement value if your car was totaled.
  • If the down payment is less than 20% for your car. This means your loan amount is high.
  • If the annual mileage on the car is high. When driven more, the value depreciates faster.
  • If the vehicle you bought has a history to depreciate faster.

When Do You Get GAP Insurance

You could either buy Gap Insurance from your car dealer. Or you could buy it from your car insurance provider. The rates are pretty high when you get it from the dealer than an insurance company. It definitely helps to know that you are not obliged to buy Gap at the same time you buy your car. When you get Gap from the dealer you also end up paying a lot in terms of monthly lease payments as these have the interest charge for Gap too.  So, it is a wise idea to compare the prices that the dealer offered with the quote from your insurance provider. By doing your math you could save a lot of money each month and pay less for the same coverage.

When you are buying your car on lease, then it might be a requirement to get Gap insurance as per the contract. You may check the contract to know if there are options to get a waiver for Gap. This may be possible for some leasing company agreement as per the finance. But before you sign the dotted line for Gap at the dealer, it is better to know how much is the premium for adding the same coverage on your car insurance policy. It is possible to cancel Gap insurance later when you feel that the value of your car is much less than the risk involved. Or you are coming to the end of your lease term. Usually, when Gap insurance was set up at the time you signed the financing or leasing agreement, then you may have to keep it until the end of the term.

Why Is Gap Insurance Important

When you finance or lease a car as an example, worth $30,000 you pay a small amount towards the down payment. After a few years when you are involved in an accident the claim may be settled for $15,000 as that could be current market value for that car. This is the replacement value that your insurance company pays you for your car. When you check with your leasing company, you may learn that you owe almost $20,000 still on the loan.

So, if you had Gap insurance that could help to mitigate your loss for the difference amount of $5,000. This was just an example but if the car in question is an expensive car, the shortfall between the replacement value and loan amount owed could be huge.

Certain Aspects To Note When You Get Gap Insurance

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All Gap insurance policies are not the same. The level of coverage may differ as per each provider. It is always good to compare the level of coverage when you buy one. Most lease contracts may need you to have comprehensive and collision coverage on the policy to honor a Gap insurance claim. It is vital that you follow and adhere all the terms and conditions of your lease as this could affect your Gap insurance claim. In the event of a claim when your car is damaged or stolen, it is important to follow the terms of your insurance company.

What Does Gap Insurance Not Cover

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Though having Gap insurance on a new car is a good idea, there are many situations in which you may not claim under this coverage. Gap insurance cannot be used to help pay your lease payments if you cannot keep up with your car loan payments for any reason. Any wear and tear maintenance or repairs cannot be claimed under Gap. In case your car is confiscated due to legal procedures, you may not claim for the loss as per Gap.  Any loans outstanding on your previous vehicle may not be applied to the new loan and then claimed under Gap insurance. In case you have taken any extended warranties on your car loan, that may not be claimed either under this coverage.


Resources:

http://www.foxbusiness.com/features/2011/06/24/what-gap-insurance-does-and-does-not-cover.html

http://www.wheels.ca/news/shop-carefully-for-peace-of-mind/