What is Gap Insurance?
Gap insurance (Guaranteed Asset Protection insurance) covers the difference between the amount owed on a vehicle loan or lease and the vehicle’s actual cash value (ACV) in case it’s totaled or stolen. Standard auto insurance typically reimburses only the car’s market value at the time of the incident, which can be significantly lower than the loan balance due to depreciation.
How Gap Insurance Works
- Depreciation:
Vehicles can lose 20–30% of their value in the first year. If you buy a car for $30,000 and it’s totaled six months later, the insurance company may value it at $24,000. If you owe $28,000 on your loan, you’d still be responsible for paying the $4,000 difference without gap insurance. - Gap Insurance Coverage:
- Covers the difference between the insurance payout and the outstanding loan/lease balance.
- It does not cover missed loan/lease payments, extended warranties, or additional fees such as late payments or overdue insurance premiums.
Who Needs Gap
?
Gap insurance is most beneficial if:
- You financed a large portion of the car’s cost (e.g., small down payment).
- Your car depreciates quickly (luxury or new vehicles).
- You have a long-term loan (60+ months).
- You lease a vehicle, as leases often have high early depreciation rates.
How to Get Gap Insurance
- Through a dealership: Often offered when buying or leasing a vehicle.
- Through your auto insurance provider: Some insurers offer gap coverage as an add-on.
- Through a lender: Some lenders provide gap coverage when financing a vehicle.
Cost of Gap Insurance
- One-time fee (if purchased through a dealer or lender): Typically $500–$700.
- Add-on to existing policy: Usually $20–$40 per year, depending on your insurer and vehicle.
Limitations of Gap Insurance
- Only covers the gap between ACV and the loan/lease balance.
- Doesn’t cover bodily injury, property damage, or repairs.
- Often requires that you maintain comprehensive and collision coverage.
Example Scenario
Without Gap Insurance:
- Vehicle purchase price: $30,000
- Loan balance at the time of loss: $28,000
- Insurance payout (ACV): $22,000
- Out-of-pocket payment: $6,000
With Gap Insurance:
- The $6,000 difference is covered by the gap insurance policy, so you owe nothing.
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