Guaranteed Auto Protection, also known as GAP insurance, covers the difference between the actual cash value of a vehicle and the balance still owed on the financing. GAP insurance is typically used on new and used small vehicles and heavy-duty trucks. GAP insurance covers the “gap” between what you owe on a vehicle and what your insurance company will pay out in the event of a total loss. While GAP insurance may not be a requirement with all vehicles purchased via loan, it is often required on a leased vehicle.
There are two major ways to acquire GAP insurance. The first is through an insurance broker and is sold as part of an automobile insurance policy. This type of coverage is regulated by the insurance industry. The second is a waiver agreement sold by a finance/insurance manager at the automobile dealership. This coverage is unregulated and is usually sold as a soft product through the automobile dealership. In some instances, it may be financed along with a lease or loan. With both scenarios, claims are subject to total loss, which is usually determined by the primary insurance company’s third-party appraiser.
Is GAP Insurance worth it?
Depending on how much you put down on a new vehicle, you could be upside down on your car loan the moment you drive off the lot. This places you in a very vulnerable position should your new vehicle become totaled or stolen.
Perhaps you purchased a car for $27,000 with $2,000 down and now have a 60-month loan for $25,000. Shortly after you purchase the car, it may only be worth $20,000 according to an insurance company. This value is based upon price surveys, industry guides, and the car’s condition. If your new vehicle becomes totaled due to an accident or theft, the amount the insurance company provides you for your car could be substantially less than the amount you owe on the loan.
How much does GAP Insurance cost?
Car ownership can be expensive when considering the principle and interest payment each month and maintenance costs. Roughly, GAP insurance will cost 5% of your annual insurance premium. Premiums are based upon comprehensive and collision coverage, which are calculated according to the car value, location, and driver history. In some cases, an amount of $15 per month would provide you with GAP insurance and the protection it provides.
Regardless of the funds required to own and maintain a vehicle, GAP insurance is a smart investment if your purchase a vehicle on credit. If you don’t have it, you run the risk of paying out high dollars on a vehicle that you can’t even drive.
To learn more about GAP insurance and protecting your investment, contact your Cole Harrison agent today!