What is Gap Insurance and When Do You Need It?

What is Gap Insurance and When Do You Need It?

Thinking of buying a new car? Apart from choosing your car’s make and model, you might also need to consider other aspects of buying the right insurance for your vehicle. Gap insurance, also known as Guaranteed Asset Protection, is one such insurance plan that many car owners might need, but may not know about. We bring you some basic insights about this protection for your car.

What is Gap Insurance?

As soon as you buy a car and drive it off the lot, it can lose up to 30% of its value, based largely on its model and make. If you have financed your car and paid less than 20% down payment, you might be upside down on your loan even before you reach home in your new car. Unfortunately, if your car gets totaled soon after your purchase, you will find yourself in a financial crisis as you will have to pay the difference between your car’s depreciated value and your balance on the loan from your own pocket. If you don’t have the cash to pay this negative equity balance, it is always a good idea to opt for a gap insurance plan.

Things to Consider When Buying Gap Insurance

Before you opt for gap insurance, make sure to check your current auto policy to ensure that you’re not already covered. There are some insurance companies that include this in their plans and other lease companies that make gap insurance a mandate in their contracts. If you purchase gap insurance from anywhere other than an insurance company, you might have to pay a one-time fee of a few hundred dollars. If you consider buying it from your existing auto insurance company, the premium gets added to your regular insurance premium. Make sure to shop around for gap insurance just like you would for your regular auto insurance and check the coverage options. Certain companies will offer to reimburse your deductible while some others might offer a vehicle replacement.

When Should You Cancel Your Gap Insurance?

If you buy your insurance through an insurance agent, make sure to cancel your coverage when you are no longer upside down on your loan. This will help you save on premium costs in the long run. To determine when is the right time to cancel your gap insurance, you should check your car’s actual cash value from time to time. When this amount is equal to your loan balance, you can consider dropping the gap insurance.

Points to Remember:

  • If you have paid little or no down payment on your loan, getting gap insurance is a wise idea.

  • Also, if your loan tenure is longer than 3-4 years, you might need to opt for gap insurance.

  • You can buy gap insurance either from your car dealer or from your insurance agent.

  • You can also consider canceling the insurance when the gap is zero.

  • Before buying your car, you can also check its depreciation rate to determine if it is important to buy gap insurance along with your comprehensive or collision coverage

You might be upside down on your auto loan without even realizing it and in the misfortunate event of your car getting totaled, not having gap insurance might cost you thousands of dollars.