What is Gap Insurance and How Does it Work?

Understanding GAP Insurance: How Does It Work?

When you buy a new car, its value starts dropping the moment you drive it off the lot. And by the end of the first year, your once-pristine vehicle is expected to depreciate by a staggering 20%. If your vehicle is totaled in an accident, the insurance company will only pay up to the current market price.

So, what happens if you lose a financed car soon after purchasing it? You might end up with negative equity, where your car’s value is less than what you owe the lender. The compensation you receive from comprehensive insurance coverage won’t be enough to pay off your car loan. That’s where guaranteed asset protection (GAP) insurance comes in handy.

GAP insurance covers the difference between the amount you owe on the car and its actual cash value, giving you peace of mind and ensuring you’re protected in the event of an unexpected accident.

Here’s how it works:

What Is the Process of Gap Insurance?

Gap insurance, also called loan or lease coverage, is an optional policy that becomes necessary when you finance or lease a vehicle.

Here’s how gap insurance works:

• Your car is declared a total loss due to an accident or theft.
• You file a claim through your comprehensive or collision insurance coverage, whichever applies.
• The insurance company pays you cash based on the market price of the car minus your deductible.
• If the company pays less than what you owe on the car loan, gap insurance pays the difference.

For instance, let’s say your car is worth $15,000 before an accident, and you have a $500 deductible. If your car is totaled in an accident, how much will gap insurance pay, assuming you have $17,000 remaining on the car loan?

To begin, your car insurance policy will pay the current market value of your vehicle less your deductible. That is $14,500 ($15,000 minus $500). Then gap insurance will pay the difference between your outstanding loan and the compensation you received. That is $2,500 ($17,000 minus 14,500).

Without gap insurance, you’d have to pay the difference yourself. But sometimes, the lenders may require you to purchase gap insurance to avoid bad debts.

What Gap Insurance Doesn’t Cover

Gap insurance covers your loan only when you lose the vehicle. So if your car has engine failure or requires repairs, the policy won’t pay for those. Also, it doesn’t compensate losses already covered by property damage liability insurance. Other losses that gap insurance doesn’t cover include:

• Additional loan charges, such as interest
• Your deductibles from comprehensive or collision insurance
• Balance brought forward from a previous lease or loan
• Penalties related to the lease
• Overdue payments
• Security deposits
• Credit insurance charges related to the loan
• Extended warranties

Do I Need Gap Insurance in Florida?

Is gap insurance worth it? To answer that question, check your car’s current value with several dealerships, such as Kelley Blue Book.

Compare that value with the amount you owe the lender. Can you afford to pay the difference out of pocket? If not, you may need gap insurance.

Here are circumstances where buying gap insurance would make sense:

• You lease or finance your vehicle (the lender may require gap insurance).
• You make a small down payment (less than 20%).
• The loan is expected to last at least five years.
• Your vehicle has a higher depreciation rate than the average rate.
• You rolled over your loan into a new one.
• You drive many miles or put your car under heavy use.

How to Purchase Gap Insurance

To get gap insurance, you must be the car’s original owner. Additionally, the car must not be older than 2 to 3 years. That said, these requirements may vary slightly, depending on the insurance provider.

You can get gap insurance in three ways:

• From car dealerships after leasing the car from them
• Car insurance companies
• Banks and credit unions

The cost of gap insurance varies from one company to another. But the average cost for insurance companies is around $60 annually. If you buy the policy from a car dealership, it might be bundled with the loan payment. And in that case, it may attract interest.

However, you can reduce gap insurance costs by including it in your collision or comprehensive coverage. Doing so will only add around 20% to your annual premium expenses.

Gap insurance is only relevant when your outstanding debt exceeds the car’s market value. After making substantial payments for your loan, you can drop the policy to avoid making financial losses.

Stay Protected with Gap Insurance

Losing a car is stressful enough. Paying a loan for the car you have lost is even worse. However, it can happen to anyone involved in a car accident while driving a financed vehicle.

That’s why gap insurance is essential. It can bridge the gap between the actual cash value of your vehicle and the amount you owe the lender.

If you want to buy gap insurance coverage, Coleman Insurance Agency can help you find the best provider. In addition, we can give you professional advice on car insurance in Clearwater.

Whether you’re looking for auto or homeowners’ insurance in Clearwater, we can help you find the perfect policy based on your needs. Call us now to discuss your needs and how we can help you.