Gap insurance is an often-overlooked but essential addition to your policy that can protect you from significant financial losses in the event of a car accident.
It’s crucial for both new and experienced car owners. Here’s more about it!
Overview of Gap Insurance
Gap insurance, also known as Guaranteed Asset Protection insurance, is a type of insurance that bridges the gap between the actual cash value (ACV) of your car and the amount owed on your auto loan or lease.
It pays the difference between what your insurance provider pays out and what you owe.
This insurance is a sort of auto insurance that you can get to protect yourself in the event that you lose your automobile and the reimbursement you receive does not entirely cover the amount you owe on your finance or lease agreement.
If the sum of your car loan exceeds the book value of the vehicle, gap insurance might cover the difference.
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How Gap Insurance Works
When you buy or lease a new automobile or truck, the vehicle’s value begins to deteriorate the moment it leaves the dealership.In reality, most cars lose 20% of their value in the first year.
Standard auto insurance policies cover the depreciated worth of a car—that is, a standard policy covers the vehicle’s current market value at the time of a claim.
If you finance the purchase of a new car and put down only a tiny deposit, the loan amount may exceed the market value of the vehicle in the early years of ownership.
Gap insurance covers the difference between what a vehicle is currently worth (which your normal insurance will pay) and the amount you owe on it in the case of an accident in which it is significantly damaged or totaled.
When to Consider Gap Insurance
It’s a good idea to consider securing gap insurance for your new car or truck purchase if you:
- Made less than a 20 percent down payment
- Financed for 60 months or longer
- Leased the vehicle (carrying this insurance is generally required for a lease)
- Purchased a vehicle that depreciates faster than the average
- Rolled over negative equity from an old car loan into the new loan
Where You Can Get Gap Insurance
On your new vehicle, your auto dealer may give you gap insurance. However, most car insurers provide it as well, and they usually charge less than the dealer.
Adding this insurance with accident and comprehensive coverage to most auto insurance policies adds only about $20 to the annual price.
Do I Need Gap Insurance?
Gap insurance may be a smart option if you didn’t put down much money when you financed your automobile or if you plan to operate it in a way that will reduce its resale value soon, such as taking frequent lengthy road trips or exploring difficult roads.
It may also be a smart alternative if you have a car loan with a term of more than five years.
Is Gap Insurance Mandatory?
Although this insurance is not necessary, it may be required by your loan agreement. It’s a good idea to thoroughly study the terms of your car loan to determine whether you require gap insurance.
You may be obliged to purchase this insurance if you lease an automobile.
How Much Does this Insurance Cost?
Your cost will vary depending on your state, driving record, age, vehicle, and other criteria, as with any car insurance. Your insurer may be able to add gap insurance to your other policy as an endorsement.
This insurance may be available from auto dealerships, but it may be more expensive than adding this coverage to your existing car insurance policy.
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The Bottom Line
Gap insurance is a sort of car insurance that covers the difference between a car’s actual cash worth and the loan or lease debt.
This insurance covers the “gap” between the amount covered by the driver’s automobile insurance policy and the amount owed on their finance in the event of a total loss.
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