Gap insurance, also known as Guaranteed Auto Protection or Guaranteed Asset Protection, is one of those coverages you won’t realize what a lifesaver it is until you need it. Unless you have experienced a total loss of a vehicle, you are probably unsure exactly what it covers. In the event you have a financed vehicle that is declared a total loss in a claim, gap insurance will pay the difference between what your vehicle is worth and what you owe on your car loan at the time.
The thing to remember is that your automobile insurance policy will pay out the current cash value of your financed vehicle, regardless of what you actually owe on the loan. Let’s say you just purchased a car, which you financed. When you drove it off that car lot, it lost value immediately. Sometimes by as much as 20%! If that vehicle were to be stolen the next day, what your policy would pay out would not be enough to pay off the loan. This gap can easily reach in the thousands of dollars, hence the need for gap insurance.
Your purchased vehicle will continue to depreciate every year. How quickly this happens largely depends on the type of vehicle you own. Luxury cars and SUVs tend to retain the most value (although there are model exceptions) and budget vehicles (especially those sold as fleet vehicles) tend to retain the least. This doesn’t even take into account your personal use and maintenance of it. Understanding your vehicle’s cash value and its depreciation rate plus what you still owe on the loan will help you better decide if gap insurance is right for you.
If after crunching the numbers, you realize gap insurance is right for you, the first step is to make sure you didn’t already purchase it when you bought your vehicle. A lot of dealerships sell this coverage and may have included it in your loan. Check your lease agreement to make sure. Most auto insurance companies offer gap coverage, but you can also purchase it through stand-alone gap insurance.