Finding the Right Policy for Gap Insurance

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Here's what you need to know...
  • GAP insurance protects you from having to pay the difference between what your car is worth and what you owe on it if your car is totaled
  • If you’re leasing a car or financing a new car, you should consider GAP coverage
  • Compare several companies’ GAP coverage policies to find one that is appropriate for you

Finding the right GAP (Guaranteed Auto Protection) car insurance policy is crucial to providing you the most benefit with the least cost. GAP insurance can seem expensive, but it could cost you much more if you do not have it.

Due to the rapid depreciation of new cars, if your car is stolen or is involved in an accident that results in a total loss you could discover a substantial gap in financial protection between your insurance coverage and what you still owe your lender.

For this reason, it is a good idea to consider purchasing a GAP car insurance policy regardless if it is required by your lender or leasing company or not.

Finding the right GAP car insurance policy involves finding the lowest rate with the most benefit from a reputable auto insurance company to ensure that you will have complete coverage if you ever need it.

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How GAP Car Insurance Works

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Cars have a market value and a retail value, and, in general, the two values are not that close, especially in the case of a newer vehicle.

In every car accident that involves an insurance claim, an insurance claims adjuster will determine the extent of the damage and the approved amount of repairs that can be made to the vehicle under that claim.

In times when the cost of the repairs exceeds the value of the car, the insurance company will consider the vehicle a total loss and, in essence, junk it. The insurance company will then issue a check to either you or your lender for the total of the car.

The problem with this, however, is that the insurance check will be for the market value of the car while you may still owe your lender for the retail value of the car.

If your car is stolen or totaled, you are still responsible for paying off your car loan, no matter how much insurance you may or may not have had on your car.

Even with full coverage for liability, comprehensive, and collision, you may not have enough insurance to cover the cost of your car loan in the event your car is totaled. This is because cars depreciate very quickly, losing value as soon as you start to drive it home from the dealer.

Since car insurance companies reimburse for market value and not retail value, you may find yourself owing money for a car that you no longer own.

For example, say your car was financed for $35,000 and your car was totaled in an accident during its second year of life. During that time frame, you paid $4,000 in principal so you still owe your lender $31,000.

However, because of depreciation, the market value for you car is now only $25,000 and that is how much your car insurance will pay you for a total loss claim.

This leaves a balance of $6,000 you still owe your lender for a car you no longer own. If you can’t afford the balance due, you will continue to painfully make car payments for a couple of more years for a car you are no longer driving.

GAP insurance relieves the financial burden of covering the loss between market value and retail value.

GAP insurance will pay you or your lender the difference between what is covered by your insurance and what you still owe on your car.

So, in the above example, if the owner of the car had GAP insurance then the $6,000 difference would have been covered by the GAP car insurance policy and the car loan would be satisfied in full.

The car would still be totaled, but at least there would be no need to make car payments on it.

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Who Needs GAP Car Insurance?

Although it is not usually required by lenders or leasing companies, GAP car insurance is a viable option for anyone who is going to have negative equity in their car.

A general guideline in determining if you need to purchase a GAP car insurance policy is based on the down payment you plan to make on your car. Anything less than 20% down constitutes a potential need for GAP coverage.

It is also a good idea to consider GAP if you are taking out a lengthy car loan, such as greater than 5 years. Certain vehicles also depreciate quicker than others, so those, too, would be candidates for a GAP policy.

The only time you don’t need to consider a GAP car insurance policy is when you pay for the car outright and there is no gap, per se, to cover.

Buying a GAP Auto Insurance Policy

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In order to purchase GAP insurance, you must also buy comprehensive and collision coverage. The expense of a GAP car insurance policy is minimal in comparison to its benefits.

In order to get the best price for it, shop around.

  • Call your agent and then contact some additional agents to request quotes.
  • Shop online. It is easy to do by conveniently entering your zip code and receiving multiple quotes from various vendors to compare almost instantly.

What is important in finding the right GAP car insurance policy is receiving the maximum benefit for the least expense.

Make sure your policy is clearly understood so that you know how much coverage you are actually getting and if there are any stipulations or exceptions of which you need to be aware.

If you are not financing or leasing your car then you do not need to worry about it, but if you are going through a lender or leasing company, then a GAP car insurance policy may be the right decision for you.

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