How Does GAP Insurance Work?
Guaranteed Auto Protection is also known as GAP insurance. You might choose to use it as optional auto insurance. If you still owe money on your new or used vehicle, and the value of the loan is actually greater than the actual cash value of the vehicle, also known as ACV of your vehicle, then GAP insurance offers financial protection against any liability that you may not be able to cover in the event of a claim against you.
GAP insurance is particularly important for anyone purchasing a new vehicle, as is well known the moment you take a new vehicle from the dealer’s lot the value plummets, and if you may be so unlucky as to have an accident in the first weeks or months of owning your new vehicle, the insurers valuation and the exposure you may have from your finance company will not be equal. This can mean that you are left financially in deficit and may need additional cover to allow you to buy a new replacement vehicle.
GAP insurance goes a step further; it not only covers accidents but also theft too. However, do take care to ensure that any GAP insurance policy you decide to buy covers all the eventualities that you could imagine occurring. The advice is do not buy a policy until you are completely convinced that it will benefit you in any eventuality.
GAP policy: Realities
GAP policies are, therefore, most important during the early years of your car’s life. Cars depreciate in value and according to the insurance company rules; this depreciation is not necessarily aligned to the real market. Regular insurance companies are more interested in the outstanding balance due on your car rather than its actual value. A GAP insurance policy can cover you for this period when you are most at risk and, therefore, is your best ally in these difficult times should anything happen. Having a GAP policy will protect you from the most extreme consequences of an insurance shortfall. Good GAP policies will also cover the premiums of your regular insurance deductable.
How does a GAP actually work?
As an example this explains how GAP insurance can work for you. Let’s imagine you buy a car for $30,000 and you are able to make a down payment of $6,000, so you are left with a repayment of $24,000 over 5 years with loan at 0% interest. This will mean a monthly repayment of $400 for your car loan. Having bought physical damage insurance that is comprehensive, and collision cover with a deductable of $500 for each incident, you are now covered for damage and losses. So far so good.
If your insurer talks about an upside down situation on your car loan or lease, you should immediately understand what that means. In effect, it means that the insurance policy on your car is worth more than the actual value of the vehicle. As a broad rule of thumb, the more expensive the car you bought and the more luxurious its make and mark can attract, the more likely you are to be at risk. Therefore, the more you have paid for the car, the more you need GAP insurance.
Essentially, should you need to make a claim for the total loss of your vehicle in the first 6 or 8 months, and your regular insurance will not cover the full amount, GAP insurance will cover the difference in most cases. However, take note, there will be deductibles that normally don’t cover the first $2,000 of the necessary payments.
Important points that you need to bear in mind
Most insurance companies do not offer or recognize GAP insurance. This is not important as the GAP insurance is an independent policy and does not depend on your regular insurance. The only important criterion for the GAP insurance company is the amount of cover needed. If you are buying a new car don’t assume GAP insurance is included, check to make sure. Talk to the salesperson at the dealer’s lot, as they have had to deal with this requirement many times. They will be able to offer you the relevant insurance, and, as they want you to do business with them, the offer you will receive should be very competitive.