GAP insurance: A fresh perspective

by Juano11 » Thu Nov 13, 2008 12:21 am

Gap insurance ensures protection for your vehicle, just like any other auto insurance policy. As a matter of fact, 'GAP' is a widely used acronym for Guaranteed Auto Protection. Read along to know how gap insurance policy serves its purpose.


What is Gap Insurance?

Gap Insurance lends a helping hand to those vehicle owners who have taken out a loan or lease to buy their cars. This form of insurance policy lends financial assistance when the insured vehicle is totaled. It pays for the difference between the actual cash value (ACV) that the conventional auto insurance pays and the due amount for the unpaid loan or lease.
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How does it work?

It is truly said that your vehicle starts depreciating the moment you buy and take it out for your first ride. The value of automobiles usually depreciates with time. It is estimated that a car loses almost 30% of its value in the first year only. Therein, your gap insurance policy comes into action.
The following scenario might be able to show you how gap insurance can be of assistance:

Sally and Molly are two friends. They buy or lease their cars at the same time. They also purchase auto insurance protection for themselves. Now...
gap insurance process
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When do you need it?

You'll need gap insurance in the following circumstances:
  1. When you take out a lease - If you have leased the vehicle, the gap insurance will pay the unpaid amount to the vehicle owner.
  2. When the repayment period is long - If the repayment period for your auto loan is 60 months or more, the value of the car will depreciate significantly within such a long period. The gap insurance will pay for the depreciation costs that your auto insurer won't pay.
  3. When the down-payment is less - If the down-payment on your auto loan is 20% or even less, the due amount on your loan will be more. Gap insurance will pay for the surplus balance after your auto insurer pays the ACV of the vehicle.
  4. When there is negative equity - If you have transferred negative equity from your existing auto loan into a new one, gap insurance will pay for the lost value of the vehicle to the financer.
  5. When you buy a used car - If you have purchased a used car with a loan, it is expected to depreciate more rapidly. Thereby, this form of insurance policy will cover the gap between the ACV and the due amount on the loan.
  6. When there is a history of value reduction - If you have purchased a vehicle with a history of depreciation in the market, the price for such a vehicle is expected to fall down even more with the passage of time. Thus gap insurance will be a great help, in case the car gets totaled or stolen.
  7. When mileage is more - You'll need gap insurance if you drive more than 15,000 miles per year. The value of your car is negatively proportional to its usage. This means that the more you use your car, the lower its ACV is going to be. Thus, having gap insurance will be an advantage for you.
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Is it mandatory?

No, Gap insurance is an optional purchase. It's picked as an additional protection for the vehicle, along with the regular auto insurance coverage. However, financing companies might put it up as a condition for the new car buyers. Top

Who offers gap insurance?

It is offered by:
  • Auto insurers - The conventional auto insurance companies also provide gap insurance protection for the cars. Major insurance companies like State farm, Progressive or Geico offer gap insurance coverage, often under a different name like Loan/Lease payoff insurance or a total loss payoff program.
  • Automobile dealers - The dealers from whom you purchase the car, sometimes also arrange for the car financing. They may also ask you to buy a gap insurance policy.
  • Finance companies - They also offer gap insurance protection to the buyers at the time of the purchase.
If you take out a lease for the car, gap insurance coverage will most probably be incorporated in the contract itself.
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How much does it cost?

The cost for gap insurance coverage is estimated to be around 5%-6% of the physical damage coverage cost, i.e. around 5%-6% of the amount you pay for the collision and comprehensive coverage. However, certain factors also affect the cost such as -
  • Value of the car at the time of purchase.
  • The auto loan amount.
  • The policy terms as offered by the different insurers.
Sometimes, the costs are financed into the auto loan amount only. Just like any other insurance, you can compare insurance quotes to get an affordable gap insurance policy. Top

Are you entitled to refunds from the policy?

You can get a gap insurance refund from the unused premiums, if your car is paid or sold off earlier than the specified time period. It depends upon your insurer as well as on the policy terms that whether you'll be able to get a full or partial refund or any at all.
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What should you consider while buying it?

The below mentioned points should be taken into account, when you think of purchasing a gap insurance coverage:
  • Verify whether it's already included - Often the car dealers or leasing companies include the gap insurance in their contracts. Thus, it is recommended that you review your policy documents before signing them.
  • Determine if you have negative equity - Gap insurance only comes into action if your vehicle has negative equity, i.e. the market value of your car is lower than the unpaid lease or loan amount. Find out how much equity you have in your car and whether it may reduce in the future.
  • Check the policy limitations - Some gap insurance policies come along with limitations like a maximum loss limit of $50,000, or with a specified loan term period. It is advisable to know about the policy limits before you buy your gap insurance policy, since some insurers pay only a specific dollar amount or a percentage of the loan balance
  • Get the other necessary coverage - Most insurers make comprehensive and collision coverage necessary, for those who buy gap insurance. Therefore, you need to ensure that you have the necessary coverage when you buy your gap insurance policy.
Gap insurance sometimes even pays for the deductible, when you file a claim against your auto insurance. However, the facilities that accompany gap insurance coverage might vary from insurer to insurer. It is advisable to sign up with a gap insurance policy, only when you fully understand what will be offered to you at the time your car gets totaled.Top

Related readings

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I'm getting ready to buy my first new car. I've waited a long time for it, but she's finally going to be mine...

Anyway, I have some questions about Gap Insurance because I know that it will be presented to me as an option while I'm in the finance department.

I'll be financing about 72K at 3.9% over 5 years. I'm not planning on putting anything down on the car because I have another loan at a much higher interest rate that I'd prefer to pay down. Therefore, I thought that Gap insurance might be a good idea.

My sister is my auto insurance agent and she was not able to offer gap insurance state farm policy directly. I'm quite confident that the product that my dealership will offer me will come at quite a premium, so I was looking to buy it from a 3rd party. I guess that I have 3 questions:

1. How much should a gap insurance policy cost me?
2. Can you recommend a reputable 3rd party gap insurer?
3. Does anyone know anything about gapinsurancequotes.com? They offer a policy for less than $400 and claim to be A-rated, but I can't find out much about them.

Many Thanks

John

Total Comments: 19

Posted: Sun Nov 16, 2008 12:09 pm Post Subject:

:P Mechanic for Lori!



Remember our "new" Prez said:

"There are things you can do individually, though, to save energy. Making sure your tires are properly inflated — simple thing. But we could save all the oil that they're talking about getting off drilling — if everybody was just inflating their tires? And getting regular tune-ups? You'd actually save just as much!"



:wink: :roll: :wink: :roll: :wink:

I voted for Palin, she's cute, but I'm NOT the least bit disappointed ObamaMan won!

How did this thread turn Poli-Tic-Ill?

Weren't we talkin' 'bout fast cars and pretty girls?



Posted: Sun Nov 16, 2008 12:23 pm Post Subject:

I'll pass on that mechanic my old husband is WAY cuter... :wink:

How did this thread turn Poli-Tic-Ill?

You did it...

Weren't we talkin' 'bout fast cars and pretty girls?

No you did that too, it was about GAP ins... :wink: (p.s. 'I' don't care when we wonder a little if the OP has been answered...just an fyi and for clarity)

Posted: Sun Nov 16, 2008 12:46 pm Post Subject:

Hmmmmmm, GAP insurance?

What's that?

Gary Approved Protection?

:twisted: Arrrrrrgh, properly and casually insurance. :twisted:

Posted: Tue Dec 09, 2008 03:50 am Post Subject: Gap Insurance Article

All this talk about Gap Insurance made me curious. I wrote up a short intro for those who might be interested. The material is probably a little basic for the regulars here, but if anyone's interested feel free to check it out.

www.carinsuranceguidebook.com/gap-insurance/

Posted: Tue Dec 09, 2008 08:45 am Post Subject: insurance

Thanks.....I WILL read it. Gosh...........sometimes all of this 'insurance stuff' can get confusing. Especially for 'Non-Experts' like me. LOL :roll:

Posted: Wed Dec 10, 2008 03:04 am Post Subject:

Thank you Carinsurance for spelling it all out so easily on the link. It really isn't very much at all to get Gap insurance. $300-700 and a one time fee? If someone is going to put that much money into a new car why not go the extra mile and add a few hundred more? It just really amazes me how much a vehicle depriciates just by leaving the lot. What is the theory behind that anyway? Can you explain why it loses so much. In your example you used an Altima and it lost $4000 instantly...how and why so much? I agree that Gap insurance is a really great insurance for new vehicle owners to have especially these days. People just do not seem to be as careful anymore. My biggest pet peeve is the ones who slam on their brakes and go from 55 to 0 in a an instant and then make a sudden turn woth no signal! That burns me to no end.

Posted: Mon Aug 30, 2010 10:52 pm Post Subject: GAP COVERAGE

I see that many people believe that their insurance agent/company is looking out for their best interest. Remember, they are in the business to make money and pay out the least amount possible. Insurance companies don't insure loans. They insure people on the cars they drive.

True GAP coverage was designed to eliminate your deficit as a result of a total loss. Your insurance company will only pay market value for your vehicle at the time it is totalled out. What does that mean? It means what they can get that same car for at an auction which is much less than blue book.

If your insurance has both policies i.e. comprehensive/collision and GAP, they can elect to enforce one or both. If you have a $12,000 vehicle with $8,000 worth of damage, they can elect to fix your car for the $8,000 and not enforce both policies, thus, saving them $4000. You DO NOT get to make that choice.

The problem with that scenario is that even though your vehicle is now fixed and looks new, if you decide to sell or trade and the buyer does a CAR FAX report on your vehicle, he will see that you had $8,000 worth of repairs done. The value of your vehicle just took a major dive!

Additionally, the GAP that dealers offer pays: your deficit up to 150% of MSRP or retail book, your deductible up to $1000, your monthly payment up to two months and for an added addendum, pay you $2,500 if your vehicle was stolen and not recovered. Tell me what Insurance company is going to do that for you. Yes, you pay a little more for a GAP policy at a dealership, but in this case, you get MUCH more than what your insurance company has offered. Oh, and most insurance companies do not offer GAP on used vehicles and only pay up to 110% of the value of your vehicle for up to 3 years only. Gap sold from a dealership covers you for the entire term of your loan.

I hope that this helps you in your GAP buying endeavor.

Posted: Sun Jul 15, 2012 07:01 pm Post Subject: owner of car dies

does the insurance company pay off car loan when the owner dies????

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