What Is Gap Insurance
Guaranteed Asset Protection or gap insurance is supplemental coverage, in addition to your comprehensive and collision coverages, that pays the difference between your car’s actual cash value, or “ACV,” and the amount you currently owe on your loan or lease when your car is totaled in a traffic accident or stolen, according to Investopedia.
For example, suppose you financed or leased a new vehicle and your vehicle is totaled within a year. At the time of the accident, your car’s ACV is $10,000, but you owe $13,500 on your loan. After your deductible of $500, gap insurance covers the $3000 discrepancy. Although uncommon, some gap policies will also cover your deductible.
Gap Vs Standard Car Insurance
Gap coverage goes hand in hand with comprehensive and collision coverage, but it is not the same.
While comprehensive and collision coverage will pay for the damages done to your vehicle when it has been totaled, it will only pay up to the current value of your car according to how much it has depreciated. For example, even if you purchased a car for $50,000, it may be worth $37,000 at the time it is totaled because of value depreciation over time. This means your standard car insurance policy would only pay up to $37,000 to replace the vehicle.
However, if you took out a loan to cover the purchase of your car, you may owe more than $37,000 for it at the time of the accident. In this case, even after your standard auto insurance policy pays to replace your car, you still owe money towards the initial loan. For example, if your auto loan balance still has $45,000 left on it and your comprehensive and collision coverage pays you $37,000 to replace your vehicle, you would still owe $8,000 in loans for the totaled vehicle.
This is where gap insurance would kick in and cover that last $8,000 so you will not have to pay that out of pocket.
Where To Buy Gap Insurance
You can purchase gap insurance policies at a flat rate from lenders and dealerships, however its going to cost you more. Purchasing your policy through an insurance company costs hundreds of dollars less on average.1
But I already spend enough on my insurance policy, this seems unnecessary. Right?
Only if youre absolutely positive your car will never be stolen or totaled as long as you own it! And unless youve got a crystal ball, thats unlikely. Gap insurance can save you thousands of dollars, and on a day thats already gone very badly. If youve just totaled your car or returned to your parking spot to find it missing, the very last thing youll want to do is worry about your remaining car payments. Purchase gap insurance through Nationwide and keep yourself protected on your worst days.
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How Much Does Gap Coverage Cost
The price for gap coverage depends on several factors:
- The actual cash value of the vehicle
- The vehicle age
- The potential policy holders auto insurance claims history
- The potential policy holders auto insurance location
- Who is offering the coverage
Auto dealerships and lenders are typically the more expensive option when it comes to purchasing gap coverage. They often offer the coverage for a flat rate between $500 and $700, which is then rolled into your car loan. That means the policyholder will pay interest on the additional coverage as opposed to paying for it outright. Going through the insurance company is typically the most cost-effective option. Certain insurance companies will offer gap insurance coverage for $20 to $40 per year when added to other insurance services.
How And When To Cancel Gap Coverage
Gap insurance is only necessary during the period of your loan or lease when the difference between the actual cash value of the vehicle is less than the loan amount, or when the vehicle is depreciating faster than youre paying it off. Check websites like Kelly Blue Book or the National Automobile Dealers Association to look up your cars value against the balance owed on your loan so youll know when the loan amount falls below the actual cash value of the vehicle. Once this happens, reach out to your coverage provider to cancel the gap coverage. Theyll let you know if any additional steps are required to cancel at that time, such as additional paperwork you may need to sign to confirm cancelation.
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Who Should Consider Gap Insurance
Those who fit the following criteria should consider gap coverage while purchasing or leasing a vehicle:
- Anyone who plans to lease or finance a car with less than 20% down and longer than 60 months. The first 60 months of the loan or lease period are the most critical months because the average car depreciates the most at the very beginning of its life on the road. Your payments will be smaller the longer you finance the vehicle, so the difference between the loan balance and the actual cash value for the vehicle can be significant during this time of your loan period.
- Anyone financing or leasing a vehicle that depreciates quickly.This can include vehicles such as sports cars, high-end vehicles, and certain electric cars.
- Anyone who purchases or includes add-ons with their loan. This can include debt from other car loans or extended service agreements. Products of that nature increase your loan amount without adding any value to the vehicle.
When You Dont Need Gap Insurance
Under the right circumstances, gap insurance can be a financial life-saver, but its not always necessary. Here are a few common scenarios where you wont need gap insurance:
- You own your car outright. Gap insurance is only useful for drivers who have outstanding loan debt on their vehicles. If your car is paid off, gap insurance isnt necessary.
- Your car is worth more than you owe. If you have equity in your vehicle meaning its worth more than you owe on your loan you dont need gap coverage. Once your vehicle is no longer underwater, you should cancel your gap coverage and make sure to get a refund for any pre-paid premiums.
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Car Gap Insurance Example
Say you purchased a new car with a sticker price of $28,000. You paid 10% down, bringing your loan cost down to $25,200. You got a five-year auto loan. For the sake of simplicity, lets say you scored one of those 0 percent new-car financing deals, so your monthly payment is $420. After 12 months, youve paid $5,040. You still owe $20,160.
One year later, the car is wrecked and the insurance company writes it off as a total loss. According to your auto insurance policy, you are owed the full current value of that vehicle. Like the average car, your car is now worth 20% less than you paid for it a year ago. Thats $22,400.
Your collision coverage will reimburse you enough to cover the outstanding balance on your car loan and leave you $2,240 to put down on a replacement vehicle.
But what if your car was one of the models that dont hold their value as well? For instance, say its depreciated by 30% since you purchased it. In that case, your insurance check will be $19,600. You owe your lender $560. And you still need a new car, which is where having car gap insurance becomes important.
Here are two examples of what you could pay, with or without car gap coverage.
|If you dont have gap coverage|
|Total Loan Amount Owed|
Do You Need Car Gap Insurance If You Have Full Coverage
Comprehensive auto insurance is full coverage. It includes collision insurance but also covers every unexpected calamity that can destroy a car, from vandalism to a flood. But it pays the actual cash value of the car, not the price you paid for it or the amount you may still owe on the loan. Gap insurance covers the difference.
Therefore, you need gap insurance if there is indeed a gap between what you owe and what the car is worth on a used-car lot. That is most likely to occur in the first couple of years of ownership, while your new car is depreciating faster than your loan balance is shrinking. You can cancel the gap insurance once your loan balance is low enough to be covered in full by a collision insurance payment.
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Unsatisfied With The Response Complain
If your Gap insurer doesn’t handle your case in a fair and timely manner, don’t be afraid to complain. Details of how to do this should be listed on your policy document.
If you’ve exhausted the insurance company’s complaints procedure and your claim has not been settled, contact the Financial Ombudsman Service .
You usually have six months from the time you reach deadlock with the insurer to make a FOS complaint.
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Is Gap Insurance Worth It
If you’re considering buying gap insurance, it’s important to remember that this type of coverage may only be available if you’re leasing or financing a new vehicle. Then, think about how much you owe on your auto loan versus the value of your car. Do you owe more than your car is worth? Could you afford to pay the difference out of pocket if your car is totaled?
According to the III, you may want to consider gap insurance in the following situations:
- If you made less than a 20 percent down payment on your vehicle
- If your auto loan is 60 months or longer
- If you’re leasing a vehicle. If you’re leasing a new vehicle, the III notes that many lease contracts include gap coverage. Check yours to see whether you have coverage.
Have questions about gap insurance? Talk to your insurance provider, who can help explain your options.
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How Long Does It Take For Gap Insurance To Pay
The amount of time between an accident and gap insurance payout can in theory be as little as five days, depending on where you live, but it is far more likely to take at least several weeks and often more than a month. Different states have different laws, and the process has multiple elements.
Generally, an insurance company takes up to 30 days to declare a vehicle a total loss, although it can take longer. After it makes a determination, the insurer will begin to process the gap payment.
You should speak to both your insurer and lender or lessor through the process to get a sense of how long it might take. Crucially, you need to find out how the timing works between your next payment and when gap insurance payment starts covering the loss.
Is Toyota Gap Insurance Worth It
Guaranteed Auto Protection from Toyota will pay or waive the difference between the auto insurance settlement for a totaled car and the amount you still owe on your loan or leaseâbut itâs cheaper to buy gap insurance through your car insurance providerMORE:
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Am I Due A Refund If I Pay The Car Off How Do I Get A Refund
If you financed your vehicle and the gap insurance is part of your vehicles financed monthly payment, it is doubtful that you would receive any refund for your gap insurance. That is because when the coverage gets paid for monthly as part of your financed monthly payment the coverage is used that same month.
If you paid for your gap insurance policy in full, you will need to contact the company that sold you the policy to see if there is any unused premium that should be refunded back to you when you trade in or pay off your car.
Does A Late Car Payment Void Out A Gap Policy
No.Being late with your car payment wont void out your gap policy.
However, your gap insurance wont pay out for the late payments if you total your vehicle and youre behind on payments. Gap coverage usually pays out the difference between your wrecked cars ACV and the remaining balance due to your lien holder on your car loan. But there are exceptions and conditions to gap policies for certain items, such as late car payments.
If you have overdue payments or were granted a payment holiday so that some payments were moved to the end of your loan, this amount wouldnt be covered by your gap policy.
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Return To Value Gap Insurance
Return to value Gap is similar to return to invoice Gap insurance, but instead of helping you get exactly what you paid for the car, it pays the difference between your car insurance settlement and the value of the vehicle when it was first purchased.
This could prove useful if you bought the car second hand, or you have had the vehicle for a long time.
How To Shop Around For Gap Insurance
As with standard car insurance, you can compare Gap insurance policies online to find the cheapest deal for you.
Whatever policy you choose, grasp the key features before you buy. The following are just some of the important elements you should look out for:
- Length of the policy
- The value of your vehicle
- How to claim on your policy
- How to cancel your policy if you no longer need it
Our cost comparison figures below show just how much you can save by shopping around.
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What Types Of Gap Insurance Are There
Like all forms of insurance, there is a variety of options available, so its well worth knowing which is best suited to your exact needs. Dont rush into agreeing any cover without knowing exactly what youre going to need. Whilst you cant have more than one GAP policy on one vehicle, a number of suppliers provide combined cover which gives you better coverage and the security that you desire.
How Much Does It Cost
It depends on many factors, including the make and model of your vehicle. You can check out ERIEs New Auto Security endorsement* to add-on to your current ERIE auto policy. The best part? Its only a small increase to yourpremium and includes New Vehicle Replacement and Better Vehicle Replacement Coverage . If youve owned your car less than two years and it gets totaled, ERIE willreimburse you the cost to replace it with the newest model year .
While youre signing the loan documents, the auto dealership may offer a gap insurance policy. Its important to compare rates before you say yes, because you may will get a better deal from the insurancecompany. Even if you already have the dealer’s gap insurance on your loan, the contract may let you opt out without penalty it doesn’t hurt to ask!
Now that you have a good overview on how gap insurance can give you extra protection while you’re paying a lease or loan on your vehicle.Talk to your local ERIE Agent who can explain the details about gap insurance and New Auto Security and give you a quote.
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How To Tell If You Have Gap Insurance
There are two places to check whether you already have gap insurance: your existing car insurance policy and the terms of your lease or loan. Gap coverage is sometimes sold as an add-on from the dealer when financing a car, so check to see if you’re already paying for it before you add coverage.
Even if you have coverage, it’s worth it to see if you can get cheaper gap insurance elsewhere, as car dealers often charge more for it.
When Did Gap Insurance Start
This coverage type began in the early 1980s to help those insured who purchased a car and found themselves owning more than the car was worth if it was in a total loss situation.
The higher price of motor vehicles, longer-term auto loans and the increasing popularity of leasing in the 1980s is what created gap protection as a type of insurance for car owners.
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What Is Gap Insurance And How Does It Work
Gap insurance is an optional car insurance coverage that helps pay off your auto loan if your car is totaled or stolen and you owe more than the car’s depreciated value. Gap insurance may also be called “loan/lease gap coverage.” This type of coverage is only available if you’re the original loan- or leaseholder on a new vehicle. Gap insurance helps pay the gap between the depreciated value of your car and what you still owe on the car.
Do I Need Loan or Lease Gap Coverage?
Buying a new car is a major purchase and an exciting one.
Don’t forget to think about your insurance needs.
The coverage you had on your previous vehicle may not be sufficient for your new car.
New car replacement coverage is one type of optional coverage you may want to consider.
You may choose to purchase this in addition to the coverage you are required to buy.
Most lenders typically require comprehensive and collision coverage.
These coverages help pay to replace a totaled car, but they factor in depreciation.
Due to depreciation, your new car loses value as soon as you drive it off the lot.
Say you bought a new car for $25,000.
Shortly after, your car was totaled in a covered collision.
Your collision coverage would pay up to the car’s depreciated value for example, $20,000.
That wouldn’t be enough money to buy the same brand-new car that costs $25,000.
If you own a brand-new car, consider adding this optional coverage to your car insurance policy.