As we all know how important it is to have insurance be it your life, health or your material things like cars & houses. When it comes to the word “insurance”, many of the newcomers go confused with the various technical terms used by the insurance agencies. If you remember the first insurance policy you bought, you definitely had faced these over-the-head technical terms.
In this blog, I’ll be talking about one such term related to car insurance, which is known as “Gap Insurance”. You might have heard it before from your insurer, but if you are here then you definitely don’t know what it means to have Gap Insurance for a car. So, don’t worry, by the end of this tiny article, you will be ready to handle this “technical” term. So, let’s just dive in!
What Is Gap Insurance?
Gap Insurance is the acronym used for Guaranteed Asset Protection. Unlike other car insurances, Gap insurance is not mandatory and is not required by law. In fact, in some cases(mentioned further) taking Gap insurance is not useful and leads to no value at all.
Gap Insurance for a car isn’t the kind of car insurance that most people think about. It is especially helpful in saving your bank balance in those situations when your car has gone into a total loss. It reimburses a car owner when the payment for a total loss is less than the outstanding loan or lease balance.
Not understood clearly? Alright, let’s get straight into it with a simple example;
Let’s assume that Maverick has bought a car worth $30000. Without paying the amount upfront, he financed it for 60 months or longer. Now, after a year or so, he, unfortunately, met with an accident which left his car totally damaged. Now he went to the insurer, where the insurer determines that the current cash value of the car is $25,000(Because of value depreciation).
Now, Maverick’s totaled car is valued at $5000 below his actual buying price which was $30000. Now, he will have to pay the loan of $30000, but the insurer is reimbursing him the current value of his car which is $25000 only. In this case, Maverick has to pay an extra $5000 from his own pocket even if he has no car right now. So, here the actual role of Gap Insurance comes into play. If Maverick would have taken this insurance then, he would have saved his extra $5000 leaking out from his pocket. The Gap Coverage will cover the extra cost in this situation.
When You Can Claim Gap Insurance?
The Gap Insurance only covers you if your vehicle is totaled or completely damaged or stolen and you owe more on your loan than the car is valued at when the incident happens. Remember, by the time the incident(Damage/Stolen) occurs, your existing car loan must be running ahead of the current value price of your car(which will be decided by the insurer at the time of claim settlement).
Let us suppose that you financed a car worth $20000 in 10%($2000) down payment, now you are left to pay only $18000. Within a month or so your car somehow got damaged. You took it to your car insurance agents, they declared the car totally damaged, and decided the car’s current value price to be $17000.
Now see you have to pay $18000 as a car loan and you are getting only $17000 from your insurer as reimbursement. Here the loan amount is higher than the current value of the car. In this situation, you can claim Gap Insurance, the extra $1000 will be paid off by the Gap coverage.
When You Cannot Claim Gap Insurance?
There are certain situations when you can not be able to claim the Gap insurance for your damaged/stolen car. It is because you owe less on your loan than the car is valued at when the incident happens. You can understand with the following example.
Let us suppose that you financed a car worth $20000, but this time you paid in 20%($4000) down payment, now you are left to pay only $16000. Within a month or so your car somehow got damaged. You took it to your car insurance agents, they declared the car totally damaged, and decided the car’s current value price to be $17000.
Now see, this time you have to pay only $16000 as a car loan and you are getting $17000 from your insurer as reimbursement. Here the loan amount is lesser than the current value of the car. In this situation, you can not be able to claim Gap Insurance, because the value of your damaged car is still higher than the loan you took for that car.
What Is Covered Under Gap Insurance?
Gap insurance can only be helpful when your car got stolen or totally damaged in some accident. Gap insurance does not cover other accident-related costs, like vehicle repairs, injuries, damages to someone else’s property, and vehicle rentals or replacements.
Who to Take Gap Insurance?
Now as you know quite a lot about the term “Gap Insurance”, now it’s time to understand who needs to take Gap Insurance?
Alright, to crack this query, you have two things to keep in your mind first- the balance on your loan, and second- the value of your car. If the value of your car goes below the loan amount with time then you must consider taking Gap Insurance for your car. You can estimate the current value of your vehicle through sites like Kelley Blue Book (KBB) or Edmunds.
The value depreciation of luxury cars is tremendous. If you buy or lease these cars you definitely consider taking Gap Insurance. These are the following situations in which one should go for Gap insurance for their cars;
- If you finance your new car for 60 months or longer, you should consider taking Gap insurance for your car because, in 5 years, the car will lose its actual value, and simultaneously your car loan will go up higher in these 60 months.
- It is a best practice to have Gap insurance if you lease your vehicle
- If you buy a vehicle with a down payment of less than 20%, then you should go for this insurance, because by the time you complete the whole payment the car’s real value will deprecate, and the amount value of the loan will increase.
- Buy a vehicle that will depreciate its value quickly, like sports & luxury cars
- Plan to put a lot of miles on your vehicle, which can speed depreciation
- Want to roll the balance of your previous car loan into the new vehicle loan
How To Get Gap Insurance For Your Car?
You can grab Gap insurance right from the dealership where you bought the car. Otherwise, you can also get it from the auto insurance company. If you want to purchase it from the dealership then you may end up paying a higher price.
You should look for insurance companies, there you can crack a better deal as compared to the dealership. If we talk about the total cost, then you will be surprised to know that taking gap insurance will generally add up to about $20 extra on average in your annual premium.
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