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What is Gap Car Insurance and How Does it Work?

If you total your car – GAP (Guaranteed Auto Protection) insurance is an optional car coverage policy that pays the difference between what the auto insurance company says the wrecked car is worth and what the driver owes on their auto loan. This applies only if the auto insurance provider declares that your car has been totaled. It covers the costs of the deprecated value of your car and what you still owe.

Consumers who finance a car should consider the benefits of GAP insurance if they want to avoid winding up with a huge bill for paying off their automobile.

Simply put, if someone owes more for the car than what the auto insurance company determines its worth, then the policyholder would have to pay the difference. Given how rapidly the value of a car depreciates, consumers might have to ante up a lot of money for a totaled car.

Many consumers who have car loans are “underwater,” meaning they owe more than the value of the car, says Frank Darras, an insurance attorney in Ontario, Calif. Fewer than 10 percent of motorists have GAP insurance, Darras estimates.

“In this economy, people just don’t have a lot of cash and they need something to drive,” he says. “The last thing they need is a two-by-four in the face because they drive it and are in a crash and end up owing thousands.”

Mark McLaughlin of Davenport, Iowa, is glad he purchased GAP insurance a few years ago when he bought a sleek silver Camaro. Just months after he bought the car, McLaughlin was stunned that the car was vandalized by neighborhood kids. The kids destroyed the car by hitting it repeatedly with metal baseball bats.

“I never thought my car would have been vandalized,” McLaughlin says. “If I hadn’t had the GAP insurance, I would have had to pay at least a few thousand dollars on my old car, plus I’d be making payments on my replacement vehicle.”

Here are eight questions you can ask yourself to get a grip on GAP:

Where Can I Get GAP Insurance?

  • GAP insurance is made available to a consumer when he buys a car from a dealership, says Sarah Holtrup, an insurance agent in Indianapolis.
  • If someone wants to buy a GAP policy after he’s owned the car for a while, he should call the dealership, Holtrup says. Most auto insurance companies don’t offer this type of coverage.

How Much Does GAP Insurance Cost?

  • A typical gap car insurance policy costs $400 to $700 for the life of the car loan.
  • Generally, a policy costs less than $1 a day or even as low as $1 a month for the duration of the loan

GAP insurance costs will depend on the length of your automobile loan, depending on dealer, lender and state. You can add GAP coverage either at the dealership or with an auto insurance company.

If you purchase a vehicle, GAP insurance payments can be incorporated into your auto loan, giving you the option to pay for the coverage monthly rather than all at once. The option typically costs between $500 and $700 once you factor in the interest charged during the loan, according to Allstate.

You can request a refund of remaining GAP payments from the dealership if you trade in your vehicle or pay off your loan early, Allstate says.

Auto insurance companies typically calculate GAP coverage as 5% of your deductible. For example, if your collision and comprehensive costs are $500, GAP insurance will add about $25 to your annual premium, according to the Insurance Information Institute.

GAP insurance is intended for the life of the vehicle loan — when you no longer have a “gap” — and under this option would add up to as little as $125 for a five-year loan.

And you don’t have to purchase it immediately when you buy a car. Some insurance companies will sell coverage as late as 12 months after the purchase or after you’ve driven up to 15,000 miles, according to Edmunds.com.

Is Gap Insurance Worth It?

Most GAP policies protect new and used vehicles valued up to $100,000, losses up to $50,000 and sometimes insurance deductibles up to $1,000, according to Allstate.

The Insurance Information Institute recommends GAP insurance for anyone in one or more of these situations:

  • If you make a down payment less than 20 percent.
  • If you finance a car loan beyond 60 months.
  • If you roll a past car loan into the new loan.
  • If you buy a vehicle that depreciates quickly, such as budget-friendly compact cars for less than $15,000 and vehicles by automakers experiencing financial problems. These vehicles depreciate quickly because they are more difficult to re-sell.

What Does Gap Insurance Cover?

  • In some cases, a GAP policy will limit the dollar amount of coverage — for instance, a $4,000 cap.
  • A GAP policy doesn’t cover missed loan payments or late fees, Holtrup says.
  • Most GAP policies won’t cover a motorist’s auto insurance deductible, Darras says.
  • If someone buys GAP insurance and then refinances the auto loan, the GAP policy is void, Holtrup says. In this instance, Holtrup urges a motorist to contact his GAP insurer and consider buying another policy.

What Does Gap Insurance Not Cover

Customers often have misconceptions about what GAP insurance covers. It doesn’t cover these situations:

  • Paying the loan if you lose your job or have a disability.
  • Reimbursing repairs if your automobile is damaged in an accident but not totaled.
  • Renting a car if your vehicle is damaged in an accident.
  • Covering the difference between what your car was worth before an accident and after it is repaired.

Do I Need Gap Insurance on my Vehicle?

  • Anyone who is “underwater” with a car loan should consider GAP coverage. Consumers can buy the coverage before or after purchasing a car.
  • Someone who bought a car and put less than 25 percent down often is underwater on the loan, Darras says. Someone whose car loan carries an interest rate of 6 percent or more and is financing the car for longer than three years generally is underwater as well.
  • A motorist can find the value of his car by visiting the Kelly Blue Book website (www.kbb.com) or the National Automobile Dealers Association’s website (www.nada.com).

Do You Need Gap Insurance for New Cars?

  • Cars depreciate quickly. Even on a new car loan, it’s likely the consumer will owe more than what the insurance company would pay in case a car is totaled. For example, Progressive points out that if you take out a loan for the full cost of a $28,000 and are involved in a crash a few weeks later, the auto insurance company may pay only $24,500. That means the consumer must pay his collision deductible and come up with $3,500 to pay the lender if the car has been totaled.

Should I Buy Gap Insurance for a Leased Vehicle?

  • In general, someone leasing a car should consider GAP insurance, says Lynne McChristian, the Florida representative for the Insurance Information Institute. Sometimes, the cost of GAP insurance is rolled into lease payments, she says.
  • Certain states, such as New York and North Carolina, require residents who lease cars to buy GAP insurance, McFarlane says. Insurance experts say GAP insurance can be less expensive when it’s for a leased car, but costs can vary.

Will GAP Car Insurance Cover My Auto Loan?

GAP car insurance is optional, but it will you pay off your auto loan should you find yourself in a situation where your car is stolen or completely totaled that you actually owe more than the car’s value. It can be very beneficial to have should you run into that situation.

Which States Offer GAP Car Insurance?

  • GAP insurance isn’t sold in some states, such as Connecticut, Louisiana and Virginia, according to McChristian. She urges consumers to check with the state where they live to determine whether GAP is available there.

Our experts at insuranceQuotes can help you find the right insurance coverage and help guide you through the process.

When comparing free insurance quotes, it’s always smart to shop around in order to find the most affordable rates.

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