What is GAP Insurance?

Guaranteed Auto Protection, or GAP, insurance is auto insurance that covers the gap in coverage between how much you owe on your vehicle and how much your vehicle is worth in the event your vehicle is totaled in an accident before you’re done paying for it. GAP insurance protects your car loan or lease. While this type of coverage is optional, there are times when it could come in handy.

For example, two months ago you bought a car for $30,000 with no down payment. Your car payments are $400 a month and you’ve only made two car payments on it so far. You now owe $29,200. Your car gets totaled in an accident. You expect to get the full value of your car since you have full coverage, but you may be in for a very rude awakening.

The value of a new car decreases 20 to 30 percent from the time you drive it off the lot, even in a 2- to 3-month period. The insurance company will only pay the market value of your car, which could be 20 to 30 percent lower than your purchase price. So on a $30,000 car, the insurance company would pay $21,000 to $24,000. This leaves a difference of $6000 to $9000, minus the $800 you already paid in monthly payments, for a total of $5200 to $8200 still owed on the car. Without GAP insurance, the amount still owed would have to come out of your pocket.

GAP insurance is a wise investment if you take out a car loan with an extended term, finance the entire loan, or borrow more than the purchase price (i.e., you finance the license, registration, tax, extended warranties, etc.). You don’t need GAP insurance if you will not owe more than your car is worth.

If you’re considering buying GAP insurance, check first to make sure you don’t already have it. Most lease companies include it in their leasing agreements and some auto insurance policies include GAP insurance as part of their standard coverage. Most but not all states offer it. You can buy it through your lender or lien holder or from your insurance carrier if they offer it.

GAP insurance can cost hundreds of dollars, usually paid in one lump sum if purchased from a vendor other than an insurance company. If you purchase it through an insurance company, it is billed as an extra charge along with your regular premium. Be careful to calculate periodically to see when the gap between the purchase price of your car and the car’s market value is closing so you can cancel your CAP coverage and avoid paying more than you should.

Not all GAP insurance is equal. Some offer vehicle replacement while others don’t. Some GAP coverage offer deductible reimbursement. Some things to consider when shopping for GAP insurance:

• Car dealers charge more for GAP insurance than other vendors;
• If buying GAP insurance online, do proper research before providing personal and financial information;
• Make sure the coverage you choose provides protection against all types of loss (accident, theft and natural disaster);

If you make sound car buying and financing decisions, you probably won’t need GAP insurance unless you just want some extra protection “just in case”. Just be sure to exercise the same due diligence you would for any other insurance purchase so you get your money’s worth without spending more than you should.