What You Should Know about Gap Insurance

Is it Necessary?

••• Getty Imags/Chris Ryan

Guaranteed Auto Protection or gap insurance was first offered to automobile owners in the early 1980s as a way of offsetting the rapid depreciation of vehicles purchased. With the cost of car ownership going up and finance plans that sometimes spread the payments out over terms as long as 72 months, automobile owners often found themselves owing more on a vehicle that it was actually worth. In the event of a total loss, the insurance company only pays the actual cash value of the vehicle. Gap insurance makes up the difference between the actual cash value of the automobile, and the amount still owed to the finance company.

What is Covered?

Gap insurance will cover a total loss to a vehicle in the event of fire, theft, vandalism, flood, accident, tornadoes, or hurricanes. Any loss that would normally be covered by comprehensive or collision insurance is also covered by gap insurance. Some gap policies cover the insurance deductible. If a gap policy covers a deductible, the deductible amount is not refunded back to the vehicle owner. Instead, the amount of the insurance deductible is applied to the amount of the insured’s unpaid loan balance. Car owners should check their own gap policy detail to make sure they know exactly what is covered if a total loss occurs.

What is Excluded?

Always read the policy carefully to find out what is excluded. If the vehicle is not fully covered by both comprehensive and collision, there is no additional coverage provided by gap insurance. Extended warranties, overdue loan payments, and equipment added to the vehicle that was not factory installed are also not covered. If a car owner still owes on a vehicle and purchases a new one, rolling over the balance, gap insurance will not cover this carryover payment.

Who is Eligible to Purchase Gap Insurance?

Car owners who purchase their vehicle through conventional financing or financing offered through a dealership are eligible for gap coverage. However, if a car is purchased through a line of credit such as a home equity line of credit, the vehicle is not eligible for this coverage.

Who Needs Gap Insurance?

People who purchase their vehicles with little or no down payment who have license and tax fees added to the cost of their loan could easily end up owing more on their car than it is worth. Any time the auto loan amount exceeds the value of the vehicle, it is advisable to purchase gap insurance.

Where to Purchase Gap Insurance

Gap insurance is often offered by an insurance company as an option available when purchasing collision coverage. It can be purchased as a stand-alone coverage by a car dealership or through a car finance company. However, the coverage is not effective unless physical damage coverage and the state’s minimum limits of liability are also purchased. The price for purchasing this optional coverage is typically around five percent of the total premium for comprehensive and collision coverage combined.

Reasons for not Purchasing Gap Insurance

Not everyone has a need to purchase gap insurance. Car owners who own a car where the value exceeds the amount of the financing have no need to purchase this additional coverage. If the owner is secure in his financial situation and his ability to continue to make car payments to pay off the existing loan balance, gap coverage may be an unnecessary expense. Car buyers, who finance their vehicles for short-term loans such as six months or one year, also do not need this coverage. If the insured has a gap waiver, an agreement where the finance company agrees to waive the difference between the actual cash value and what is owed on the vehicle in the event of a total loss, there is no need to purchase gap insurance.

Gap Refunds

After a vehicle is paid off, any unearned premium is refunded to the insured. For instance, if a vehicle is financed for 48 months but is paid off in 24 months, two years’ worth of premium charges are due back to the insured as gap coverage is normally paid for in advance. In addition, a car owner who sells or refinances the vehicle is also owed a refund. When refinancing a vehicle, the owner should make sure to request gap coverage is added to make sure he is covered in the event of a total vehicle loss.

Your insurance agent may be able to help you decide if you need to purchase gap insurance. It is an optional coverage intended for newer cars. By adding gap coverage to your collision coverage, you will not be responsible for the balance of a loan due if your vehicle is involved in a total-loss accident.

Gap insurance is most helpful if you have financed your vehicle for a long-term, 4,5, or possibly even 6 year. Dealerships are offering many such long-term finance agreements to help people who couldn’t otherwise afford the monthly car payments. If you have one of these longer finance terms, the amount of time that you own more on your car than it is worth will be longer and gap insurance could help protect you for that period of time.

Ultimately, you will have to make the decision if you think the cost of the insurance is worth it to