Understanding What is Gap Insurance

guaranteed asset protection policy and pen

Guaranteed Auto Protection Insurance, generally known as Gap insurance was originally made to protect the drivers from increased prices of new vehicles. In simple words, when a person met an accident and if the vehicle is completely destroyed and the full value of the vehicle is depreciated, then gap insurance can help in recovering the difference between the loan owed from the person and current value of the car.

It is not mandatory for everyone to have gap insurance. If you are planning to buy a new vehicle, then it is recommended to have gap insurance for the protection of its value. Sometimes, it is also known as gap protection or totaled protection. Though the standard car insurance policy will also cover typical damage or theft charges, if the damaged car’s cash value is less than the loan amount, then the gap’ won’t be covered by insurance.

Benefits of Gap Insurance

Gap coverage is popular among car lovers because of the numerous benefits it provides. So here are some of the major benefits of choosing Gap coverage.

1. Huge Financial Gap Coverage

One of the best benefits of gap insurance is that it offers huge financial gap coverage. Almost every new GAP policies promise to protect both used and new vehicles that are valued up to $100,000, losses up to $50,000 and sometimes $1000 insurance deductibles.

2. It Can Be Paid In Different Ways

Another great benefit of the gap is that you can pay it using different ways. If you buy a vehicle, then you also have the option to include the insurance payments into the auto loan. By doing this, you will be able to pay the amount on a monthly basis rather than paying all at once. If you want to go with this option, then it will cost you around $700. In case you pay off your loan early or sell the vehicle, then the refunding policy is also applicable and you can also apply for refunds from the dealer of the remaining payments of GAP. Though you don’t have to purchase GAP immediately after purchasing the vehicle as some insurance company sells coverage after driving 15000 miles or after 1 year of the purchase.

3. It is made for only One Purpose

If you want to know what the main purpose of Gap insurance is in a precise form, then it is made for fatal accidents when your car gets destroyed completely. Some people have confusion regarding their coverage. So here are some of the things that GAP doesn’t cover:

• Loan payment if you have employment issues or any disability

• If you rent a car when your vehicle is damaged

• Common repairing charges due to a minor accident, gap applicable for a totaled vehicle

• Covering the difference between the car worth’s after your car gets repaired and your car’s worth before the accident

Things Everyone Should Know About Gap Insurance

So these were some benefits of Gap coverage. Along with the benefits, it is also important for you to know other important things. The insurance industry is much known for its terms and conditions. One should always know about everything before choosing an insurance policy. So here are some important things about GAP insurance that every person should know.

Only For Your Vehicle

This is one of the main points that confuses a lot of people. If you invest your money in GAP coverage, then it simply means that it will only cover the vehicle. Under any circumstances, it has nothing to do with the buyer of the vehicle. The GAP is not responsible to protect the buyer and the buyer will not receive the payout from this type of insurance.

Lender Won’t Offer It

As mentioned above that GAP doesn’t protect the buyer. Only the lender is entitled to receive the payout and you have to keep in mind that the lender will rarely offer gap insurance. And if they offer you, then they have all the rights to collect payout directly from you without involving an insurer.

You’ll Have To Pay Off

Though it can be said that the lender has a benefit and being a buyer you’ll have to pay an upfront amount for it. In simple meaning, you can say that you are purchasing a policy and paying the company to insure them. That’s why it is recommended to research properly and think from all the angles before putting your money on it.

Things That Gap Insurance Doesn’t Cover

Gap coverage can prove very beneficial to eliminate some financial burden, but you should also know what GAP doesn’t cover. Though you will a detailed explanation of this in the article later. Here are some things that GAP doesn’t cover:

• It doesn’t cover the extended warranties cost

• Payment of loan or overdue lease at the time of loss

• Deposits of non-refundable security for vehicles on lease

• Carryover amounts or balances from previous leases or loans

• Anything related to lease or loan such as credit life, disability, accident, or any health insurance

• Any lease penalties because of excessive use, normal depreciation

Some Frequently Asked Questions

So after discussing all the fundamental things about gap insurance, it’s time to take a further step. Though gap insurance is popular among people and some people have confusion regarding it. If you have some questions running in your mind, here are some of the most common questions that a lot of people have in their minds. So if this sounds interesting, then keep reading this article. Now without wasting any time, let’s jump into the questions.

1. How Does Gap Insurance Work?

There is no doubt in saying that the value of any vehicle starts depreciating after the vehicle is out of the showroom. And you won’t get the same value if you decide to resell it. According to surveys, it is also said that within the first year, a vehicle’s value depreciates by 20%. This 20% is only if you take care of your vehicle. If your vehicle has faced any accident, then more depreciation will occur. When you first buy the vehicle, then you deposit a small amount of money. However, to the time of ownership, the market value of the car decreases and it even decreases to a point when the loan of the car becomes more. In this case, if an accident occurs, then the GAP will pay the amount you owe on that vehicle and the market value of the car will be covered by the standard insurance.

2. What Does GAP Insurance Cover?

As mentioned above, the GAP insurance fills the gap between the due loan amount and the actual value of the car. Though GAP helps in this, but it can be used if you met an accident and total your car. In simple words, if you want to purchase a vehicle, then along with the showroom cost price of the car, it is an additional cost of insurance that the vehicle owner can spend to protect their vehicle. Here are some good reasons to invest your money in GAP insurance if:

• The down payment of the vehicle is less than 20 percent

• Your financing is financing will be going above 5 years

• You got the vehicle on lease

• You have selected the vehicle whose depreciation rate is rapid that average of the deal

3. What is excluded from it?

Though Gap insurance is very beneficial, but it is very important to read all the policy documents very carefully before taking any step. The reason why it is important is that it will tell you what is excluded from the insurance. Speaking of the gap insurance, additional coverage will not be provided, if the vehicle is not insured or covered fully with the collision and comprehensive. Other things such as overdue loan payments, extended warranties, equipment that are added by the person, not by the company also won’t be covered. If the owner of the car buys a new vehicle despite owing a vehicle, then the carryover payment won’t be covered under the Gap insurance.

Who is Eligible to Purchase Gap Insurance?

All the car owners who purchase their vehicle through dealership financing or conventional financing are eligible for gap insurance. The exception is credit purchase. So the vehicle won’t be covered by gap if it is being purchased through a line of credit, for example- home equity line of credit.

Who Needs Gap Insurance?

If you are confused about whether to take gap insurance or not, here is a simple explanation. People who have additional tax and license fees to the loan cost and people who have a little down payment. In short, if the loan amount is exceeding the car’s worth, then you should consider taking gap insurance.

Where You Should Purchase Gap Insurance?

Most of the time, it is offered at the time during collision coverage purchase as an option by an insurance company. Though it can also be purchased by a finance company or a car dealership as stand-alone coverage. However, if it’s not physical damage coverage, then it is not that effective. Coming to the price, it is around 5% of the collision and comprehensive total amount together.

Should You Add New Car Replacement Insurance?

Along with the Gap, another term that is used quite often is new car replacement insurance. Some people confuse this with gap insurance but it is like an addition to the gap coverage. It ensures more safety and security of your vehicle. If you are planning to buy a new vehicle, then you can add new car replacement insurance. Though some companies offer this coverage with their auto policy whereas, in some companies, you will have to ask for it.

So if you wondering what new car replacement insurance is then in simple words, if your new car gets damaged before completing the fixed miles by the company, then the insurance company is liable to replace the car with the new one. It comes with one condition that you will get a replacement with the same model vehicle and all the equipment and other things will be the same.

What is the Average Cost of Gap Insurance?

The cost of gap insurance might fluctuate and it depends on the methods you are choosing to make payments. However, if you are curious to know about the average cost, through an auto insurance company is around $80 annually and if you choose a lender policy, then it will cost you around $800, can be paid on a monthly basis.

How to Get the Best Deal?

If you want to get the best deal, then you will have to research properly. Mainly there are three options available to buy it. It includes a dealership, an insurance firm or an auto insurer. Out of all three, the dealership insurance can be a bit expensive with fewer benefits in comparison to others. To get the best deals, you must know the loan policy, terms and value of the vehicle. It is also important to choose one that is suitable for you and your needs.

Can You Buy it after totaling your Car?

No, it is not possible to buy insurance to cover a loss that you have already suffered. It is mandatory to buy the insurance before anything happens to the car. Though you can buy it for a new vehicle.

The Final Verdict

So this was all the information regarding gap insurance. If you are worried about your vehicle and want to increase its safety, then you should opt for Gap coverage. Though all the information is mentioned above, you should consult an expert to get all the minor points in a detailed way. An expert will not only give you perfect advice but it will also help you choose additional coverage options to ensure maximum safety. Hope this article will solve all your doubts and queries.

Mark Jorel Snow

Mark Jorel Snow brings over 15 years of financial experience to help everyday people master their money. Mark is passionate about making complex financial topics simple. His down-to-earth explanations empower readers to take control of their finances with confidence. Mark specializes in creating tailored money strategies and providing unmatched personal support. When he's not coaching clients or penning his latest article, you can find Mark enjoying nature and time with family.

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