GAP Auto Insurance: Safety Net or Ripoff?
Car Insurance to Cover Total Loss of New Car: Is It Worth It?
Imagine driving off the car lot after having been through the tiresome ordeal of purchasing a new car. A brief lapse in judgment causes the driver to wreck into another car, causing significant damage to the new auto.
The new car is already declared a total loss by the driver’s auto insurance. Worse, the auto insurance company has determined that the actual cash value of the car is suddenly far less than the amount the driver owes the lender. Just by driving the car off the lot, the car had already lost value.
This is where GAP auto insurance may come in handy.
Auto Insurance: What Is GAP Insurance?
GAP actually stands for Guaranteed Auto Protection. However, its definition is just as it sounds: it closes the gap between what the driver owes on a loan and what the auto insurance company has determined for the actual cash value (ACV) of the damaged car in the event of a total loss.
For example, a tree crushes a new car which was purchased at $24,000. When the claim is made, auto insurance values the car at only $20,000. However, the loan amount including interest and taxes is $26,000 and the lender still wants the full amount owed by the driver. GAP pays the $6,000 difference.
GAP insurance is also available for leased cars, however it is typically written into the lease contract rather than being presented as an option. If GAP insurance is not presented as an option on a car lease, it may be wise for the driver to shop auto insurance companies for GAP insurance unless the car lease provides a GAP waiver.
The driver electing GAP auto insurance must be covered under full auto insurance which includes collision, liability, and comprehensive coverage.
Auto Insurance: When is GAP Insurance Elected?
If the car loan is indirect, the car dealership typically asks the car buyer whether he or she would like to purchase GAP insurance. If the car loan is direct through another lender, it is up to the car buyer to elect GAP insurance at the loan origination.
Regardless of how the driver obtains the car loan, GAP insurance must be elected at the time of car loan origination. If the driver would like to purchase GAP insurance at a later date, the loan must be refinanced.
Auto Insurance: How is GAP Insurance Paid?
Car buyers pay a one-time fee for GAP insurance. While GAP insurance does not require a monthly fee as does auto insurance, car buyers can finance the cost of GAP insurance into the car loan.
Auto Insurance: Who Should Consider GAP Insurance?
Because so many car buyers are financing higher amounts on their car loans with little or no down payment, the majority of car buyers should consider electing GAP insurance. This is particularly true if the car buyer
- paid a down payment of less than 30 percent of the total car purchase price
- financed more than 70 percent of the dealer cost or actual cash value of the car
- financed car for 24 months or longer
- drives in excess of 12,000 miles per year
Auto Insurance: The Bottom Line on GAP Insurance
GAP auto insurance is an important addition to regular auto insurance. While GAP insurance is often overlooked, understanding the benefits of GAP insurance is important to making a decision that could save the driver thousands of dollars if the car is damaged and declared a total loss.
See related articles, “How to File a Claim With Auto Insurance,” “The Basics of Auto Insurance,” and “Understanding Auto Insurance Terminology.”
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