What is Gap Insurance and When Do You Need It?
Gap (Guaranteed Asset Protection) insurance, also known as loan-lease payoff coverage offers car owners valuable financial protection in their car’s early age. When you have a loan or a lease on your car, getting gap insurance might be an effective way to save money. If a loss occurs on your vehicle, gap insurance will pay the difference between the outstanding loan of your vehicle and its actual cash value (ACV).
How Does Gap Insurance Work?
Let’s say your car gets totaled by a covered incident like theft, an accident, hurricane, flood or vandalism. If you have comprehensive or collision insurance, your insurance provider will pay the actual cash value of your car at the time of the peril. If it happens in the early years of your car’s life, this amount will be relatively less than the amount you still owe on your car loan or lease. The gap is defined as the financial shortfall you owe when the ACV is less than what you owe a financial company. If you are upside down (owe more on the loan than your car’s value) and your car gets totaled because of an accident, this insurance is extremely useful.
What are the Gap Insurance Terms?
Before buying gap insurance, it is best to understand its terms so you can be sure that it will offer the required financial support. While some gap policies will also pay the deductible you paid on your main insurance, not all policies will cover this cost. For instance, you have bought a car for $20,000, paid $1,000 down payment and $500 deductibles for physical damages and losses. If you happen to get involved in an accident soon after your purchase, your balance loan will be $18,500 at 0% interest. If your car’s ACV is $16,000, the insurance company will pay $15,500 ($16,000 - $500 deductible). In such a scenario, gap insurance will help you pay the remaining amount on your loan (either $2,500 or $3,000, depending on whether deductibles are included in your gap policy).
How Much Does Gap Insurance Cost?
On average, gap insurance can cost you around $20 a year, if you buy it from an insurance company and bundle it with your collision or comprehensive coverage. If you buy it from a lender or a dealership, you might have to pay a one-time fee of about $500 to $700.
When is Gap Insurance Required?
If you’ve made a small down payment or no payment at all, purchasing gap insurance might be a good idea. Also, if your loan tenure is four to five years, you should consider getting gap insurance. For those who lease a car, gap insurance is a must in most cases. In fact, many lease agreements include gap insurance in the contract itself. Another good time to buy gap insurance is when the car you have purchased tends to lose its value faster than other cars.
Although gap insurance is not required by law, it is good to have one if you owe more money on your loan than the value of your car.