FILLING THE GAP

 What Is GAP Insurance?

GAP stands for Guaranteed Auto Protection. Gap insurance covers the difference between what your car is worth and what you owe on the car. It comes into play if the car is stolen or totaled (damaged to the point that repair would cost more than the car is worth) while the owner is still making payments. Gap insurance can provide valuable protection during the early years of your car’s life if you have a loan or a lease. If your vehicle has been totaled, your insurance company typically pays the actual cash value. That may be less than its actual retail value. It can also be less than the amount you still owe on your loan or the amount due for a lease payoff. The difference between your insurance deductible and the loss is the “gap” you have to worry about. If this is the case, GAP insurance will pay the difference between the actual cash value (ACV) of the vehicle and the current outstanding balance on your loan or lease. While many think of protecting your vehicle when considering insurance, GAP insurance is focused on protecting you against the loan or lease you have tied to that vehicle.

If you are considering purchasing gap insurance, you should first determine if you will be “upside down” on your car (you owe more than it is worth). If your car was purchased completely using a loan, or only putting a minimal amount down, this could often be the case. Other instances where it may apply is when the car you purchase depreciates rapidly or your loan has a high interest rate. Many buyers will always be right-side-up on the car and won’t need gap insurance, especially if they put down a large amount when the car was purchased.

Gap insurance is much more critical for a lease. You are responsible for the cost of the car if it is stolen or totaled. The total of lease payments is significantly lower than the value of the car so the difference between what you have paid and the value of the car can be huge. Gap Insurance will cover that difference in the case that you owe the leasing company. Many lease contracts actually require it.

An example of how GAP insurance may apply is:

1. You purchase a car that costs $15,000 and you drive it off the lot.

2. After paying the down payment you owe $14,000 in car payments over five years

3. You purchase physical damage insurance (comprehensive and collision) with a $500 deductible to protect you against damages and loss.

4. You have an accident and your vehicle is totaled.

5. The insurance company determines that the actual cash value of the car is only $12,000, but at the time of the loss you still owe $13,500.

6. Gap insurance should pay the difference ($1500), and possibly will cover your deductible. (Not all gap policies pay the deductible)