GAP insurance can provide additional coverage to help cover the gap between the outstanding balance on a car loan, lease, or actual value of the vehicle. Understanding GAP insurance is helpful for those who owe more on their car loan or lease than the market value of their vehicle.
As a licensed insurance broker, I often discuss GAP insurance with my clients who owe more on their vehicle than it is worth. But what is GAP insurance? In this article, we’ll explore the definition, benefits, drawbacks, and alternatives to GAP insurance to determine if it is the right choice for you.
Table of contents
What Is GAP Insurance?
Guaranteed Asset Protection insurance, or GAP insurance, is a type of coverage that can protect individuals from financial loss in the event of an unrecovered theft or total loss of their vehicle.
Based on my experience as an insurance broker, here are some factors to consider when choosing GAP insurance plans are:
|GAP Insurance||Insurance that covers the difference between the value of your car and the amount you owe on it in the event of a total loss|
|Total Loss||A situation in which the cost to repair a damaged vehicle is greater than the value of the vehicle|
|GAP Amount||The difference between the value of your car and the amount you owe on it|
|Coverage||GAP insurance typically covers the GAP amount, as well as certain fees such as deductible amounts|
GAP insurance is a type of insurance coverage that helps to protect individuals from financial loss in the event of a total loss or unrecovered theft of their vehicle.
It is designed to cover the gap between the outstanding balance on a car loan or lease and the vehicle’s actual value at the time of the loss.
If an individual has a car loan or lease with an outstanding balance of $20,000, but the current market value of their vehicle is only $15,000, GAP insurance can help to cover the remaining $5,000 balance.
This can be especially important for individuals who are upside down on their car loan or lease, meaning that they owe more on their loan or lease than the current market value of their vehicle.
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How Does GAP Insurance Work?
As a licensed insurance broker, my clients often ask me how GAP insurance works. GAP insurance can typically be purchased when financing a new or used vehicle, or it can be added on to an existing car insurance policy.
The cost of GAP insurance can vary depending on factors such as the make and model of the vehicle, the length of the loan or lease term, and the state in which the vehicle is registered.
To claim GAP insurance, an individual must first file a claim with their traditional car insurance policy. If their vehicle is deemed a total loss or is unrecovered after a theft, the GAP insurance policy will kick in to cover the remaining balance on the loan or lease.
Benefits Of GAP Insurance
The chart below lists some of the most common benefits of GAP insurance based on my experience in the field.
|Covers GAP Amount||GAP insurance covers the difference between the value of your car and the amount you owe on it in the event of a total loss|
|Protects Against Finances||GAP insurance can help protect you from financial loss if you owe more on your car than it’s worth|
|Covers Deductible Amount||GAP insurance may cover your deductible amount in the event of a total loss|
|May Be Required by Lender||In some cases, your lender may require you to have GAP insurance if you have a loan or lease on your car|
There are several key benefits to purchasing GAP insurance, including:
- Protecting Against Financial Loss: GAP insurance can help to protect individuals from financial loss in the event of a total loss or unrecovered theft of their vehicle. This can be especially important for those who are upside down on their car loan or lease, as they may still be responsible for paying the remaining balance even if their vehicle is no longer in their possession.
- Covering Additional Costs: In some cases, GAP insurance can also cover additional costs associated with a total loss or unrecovered theft, such as towing and rental car fees.
- Peace Of Mind: GAP insurance can provide peace of mind for individuals concerned about the potential financial risks associated with owning a car.
Drawbacks Of GAP insurance
|Additional Cost||GAP insurance is an additional cost beyond your regular car insurance premium|
|May Not Be Necessary||GAP insurance may not be necessary for all drivers, depending on the value of their car and the amount they owe on it|
|May Be Limited In Coverage||GAP insurance may not cover all types of losses, such as those resulting from theft or natural disasters|
|Not Required By Law||GAP insurance is not required by law, so it’s important to carefully consider whether it’s worth the additional cost|
While GAP insurance can be a valuable coverage option for certain individuals, there are also some potential drawbacks to consider, including:
- Additional Costs: GAP insurance can be an additional cost to an individual’s car loan or lease payments. This makes it more expensive to finance a vehicle, especially if the coverage is not deemed necessary.
- Exclusions: GAP insurance policies may have exclusions or limitations that prevent coverage in certain circumstances. For example, some policies may not cover leased vehicles or may only cover vehicles that are less than a certain age or mileage.
Alternatives To GAP Insurance
While GAP insurance is a great option, it isn’t for everyone. Below, I have compiled a list based on my professional experience as a licensed insurance broker of some great alternatives to GAP insurance so you can find a right plan!
|Save For A Down Payment||Save up a larger down payment when purchasing a car to reduce the amount you owe on it|
|Consider A Short-Term Loan||Choose a shorter loan term to pay off your car faster and reduce the amount you owe on it|
|Refinance Your Loan||Refinancing your car loan may allow you to secure a lower interest rate and reduce the amount you owe on your car|
|Buy A Less Expensive Car||Consider purchasing a less expensive car to reduce the amount you owe on it|
|Choose A Higher Deductible||Opting for a higher deductible on your car insurance policy may lower your premiums, allowing you to save money in case of a total loss|
There are several alternative options or strategies that individuals may consider instead of or in addition to GAP insurance, including:
- Increasing Personal Car Insurance Coverage: Some individuals may choose to increase the coverage on their personal car insurance policy to better protect against financial loss in the event of a total loss or unrecovered theft.
- Purchasing A Higher Deductible: Another option is to purchase a higher deductible on a personal car insurance policy, which can help to lower the overall cost of the policy but may also result in higher out-of-pocket expenses in the event of a claim.
- Paying Off A Car Loan Or Lease Faster: Some individuals may choose to pay off their car loan or lease faster to reduce the gap between the outstanding balance and the current market value of their vehicle. This can help to reduce the risk of being upside down on the loan or lease and may also make GAP insurance less necessary.
While GAP insurance can be a valuable coverage option for those concerned about the financial risks of owning a vehicle, it isn’t for everyone.
It is important to consider the benefits, drawbacks, and limitations of GAP policies and additional pricing. Individuals may prefer alternative options or strategies to GAP policies, such as increasing car insurance coverage, purchasing a higher deductible, or paying off car payments faster.