What Is Gap Insurance – Is It Worth It

If you are wondering if, “Do I need
gap insurance” or “How does gap insurance work?” then you will get all your answers here. GAP stands for “Guaranteed Asset Protection” or “Guaranteed Auto Protection”. Gap insurance provides insurance of the amount which is the difference between the actual cash value of the vehicle and the amount you owe on your auto insurance. Lets understand how does gap insurance works by giving you an example:

 

HOW DOES GAP INSURANCE WORK

“If someone is involved in an accident and the car is totaled (Total Loss). Meaning the cost of getting the car back in running condition on roads after repairs exceeds the actual value of the car. At this point in time if the amount you owe on your car loan exceeds the actual value then you will be in problem.

Suppose you the actual value of the car after accident is $5,000 and the amount you owe on the car is $10,000 then your insurance company will only pay you $5,000. You can purchase gap insurance for the remaining amount of $5,000 to cover the financial loss and pay that amount to the bank.”

WHY DOES THIS GAP OCCUR AND

THE IMPORTANCE OF GAP INSURANCE

Consider the example below to understand why does this GAP occur:

Auto Loan Amount: $50,000

Remaining Loan Balance After 1 Year: $45,000

After 2 years, car’s actual value at the time of accident: $20,000

Deductible Amount: $700

Auto Insurance Provider Will Pay you: ($20,000 – $700) = $19,300

GAP Insurance Which Can Be Purchase: ($45,000 – $19,300) = $25,700

DO YOU NEED GAP INSURANCE? or

SHOULD YOU PURCHASE GAP INSURANCE?

You should purchase gap insurance if:

  • The value of your car is more than the insured value. If you own a classic car as a collectible or an expensive sports car. May be an automobile which is not common. Cases when you have purchased a new car at the dealership.
  • If you drive daily and long hours (To and fro from office).

 

  • If you have a new car and you are a high risk driver. May be due to an earlier accident you were involved in.

 

  • It is good to purchase gap insurance and keep it till the worth of your car is same as the loan amount. In other words, gap insurance is somewhat necessary if you have financed your car through a bank. You owe the amount and to minimize risk gap insurance is important.
  • If you are a vintage car collector.
  • If you are leasing out a car. In fact it is a must if you are leasing a car. You never know when the value of your car will depreciate below the amount which you owe on your car loan.
  • If the model of the vehicle purchases has a previous history of high depreciation value.

Please note that gap insurance is purchased over and above a standard car insurance policy. It acts as a supplemental car insurance plan or a rider. Also, if you do not have comprehensive and collision coverage then it is highly possible that your gap insurance will be dishonored.

WHO DOES NOT NEED GAP INSURANCE

  • If you have purchased your car outright and there is no financing involved then you don’t need gap insurance.
  • If your car’s worth is far more than the loan amount. This is possible if your equity (down payment) is high. May be around 50% or more.
  • Even after the car accident, you can pay off the loan in your own capacity.
  • If your car loan is for a very short tenure. May be 12 months maximum.

HOW MUCH IS GAP INSURANCE – COST

Typically it would cost you around 7% to 8% of your comprehensive and collision coverage. Around $30 to $40 annually

WHERE TO PURCHASE GAP INSURANCE POLICY

If you are leasing out a car then usually it will come with your leasing contract at the car dealership store. You can also purchase through an insurance agent or online at various car insurance website. If you purchase gap insurance through an insurance agent then it will be regulated by the insurance industry norms.

One more way which is not regulated by the insurance industry is purchasing through finance and insurance manager. Gap insurance is optional however it may be mandatory if you are financing your car. Some states, like Louisiana, have a mandate that purchaser

WHAT IS GAP INSURANCE REFUND

When you purchase a gap insurance policy, by now it is quite obvious that once you pay off your car loan, you don’t need gap insurance. Generally you will have to pay your gap insurance premium all at once. If it is $30 each month and your car loan is for 60 months then you will have to pay $1800 upfront against the premium.

During the tenure of the loan if you decide to sell off your car or plan to get a refinance then you are eligible for a refund. Although, the entire premium is paid upfront, it is prorated on the full tenure.

DIFFERENT TYPES OF GAP INSURANCE POLICIES

GAP insurance comes in various forms based on your requirement as discussed below:

Agreed Value Gap Insurance Explained: This is a form of guaranteed asset protection. This is useful to protect your vehicle from future depreciation. If you have owned a car for more than 180 days then agreed value gap insurance could be the right choice. We all know that a car cannot be termed as an asset. Meaning, it’s value will reduce over time. Hence, the day on which you take out the agreed value gap insurance, your car is valued and that value is locked for at least 4 years against and accident.

Finance Gap Insurance Explained: This is what we have discussed in this entire article as a whole. To summarize, this insurance will cover the difference in amount if your car is written off due to accident or being stolen.

VRI Gap Insurance: To explain this, let me give you the full form of VRI (Vehicle Replacement Insurance). Your car will be replaced with the same model and new vehicle. It will be replaced even if the price has increased.

Contract Hire Gap Insurance: It eases out your financial burden by paying out the difference between your car’s valuation and the amount your owe on your car finance.

Combined Returned To Invoice Gap Insurance: Again it will pay out the difference between the value of your car (Mentioned on the invoice on the purchase day) and the insurance money which your car insurance will pay you.

Deferred Gap Insurance: To beat the competition band-wagon, a lot of motor insurance companies will offer you gap insurance FREE for the first 12 months wherein your written off vehicle will be replaced by a new one. Under this scenario, it would not be a sensible idea to buy your own gap insurance when you already have one. In deferred gap insurance the start date of your own gap insurance policy is deferred to a later date. So, if you want a gap insurance policy for 4 years then you would buy your own gap cover for 3 years and defer the start date 12 months later when the initial cover is over.

Lease Car Gap Insurance: In the world of gap insurance, the way you have purchased your car matters a lot. Whether it is an outright purchase (in this case you don’t need gap insurance) or you have financed your car. If you have leased your car and after you have paid off your loan you will be the owner. In this case leased car gap insurance will be the right option.

Leave a Reply

Your email address will not be published. Required fields are marked *