Do You Need GAP Insurance?

Posted on Jan 7th, 03:47 pm, under Are You Covered?

Let's assume your car is totally wrecked in an accident, or stolen. Are you certain that your insurance provider will cover the entire amount? The answer can depend on how you financed your car, and you may need another type of insurance called GAP (guaranteed auto protection) coverage in certain cases.

GAP coverage literally covers the difference, or gap, between what you still owe on your car and its actual value. With a simple one-time payment of a few hundred dollars, you can clear your debt to the insurance company in case your car is destroyed or stolen within the first few years of ownership or during a lease.

So why would you ever need GAP insurance? Because your car's value depreciates drastically during the first few years (simply buying it from the dealer takes off 20 percent). If you were to lose your car to theft or damage, your insurance company would only pay you the actual cash value (ACV) of your car. However, if you took out a loan that was worth more than the car's ACV, you'd immediately find yourself at a disadvantage, to put it mildly.

It is highly recommended that you get GAP insurance if you have rolled over your negative equity from a previous car loan into a new loan; made a down payment of less than 20 percent on your car; financed a car that depreciates especially quickly (such as a luxury vehicle); or financed for 6 years or more.

In any of these above situations, a buyer is considered to be "upside down". This is when you owe more on a car than it is worth. You should generally avoid being upside down in the first place; if it can't be helped, make sure you get GAP coverage.

In the case of a leased vehicle, it really makes sense to get GAP coverage, because even though you haven't purchased a car outright, you are still responsible for the vehicle's cost if it's totalled or stolen. The amount of money you put into the car (in the form of your lease payments) is much lower than its actual value. As a result, the difference between these two amounts can be enormous, if you actually lose the vehicle. GAP coverage is crucial for leasing cars, and so naturally most lease contracts require this form of insurance. 

We'll look into the finer details of GAP insurance next week. Until then, stay safe, and happy motoring!