Gap insurance: What is it, and how does it work?
GAP insurance policy is designed to cover the difference between the value of your vehicle and your loan balance. But how does it work? Who is affected by it, and is it worth the extra payment?
Well! As you know, purchasing a car involves a lot of questions, concerns, and considerations-and that’s when you think about its insurance.
Also, when you select a vehicle, ensuring it can be confusing due to many terms, buzzwords, and definitions. This is why most dealers and finance companies offer gap insurance.
If you want to know more about it, we’ll explain GAP insurance meaning, how it works, and how it can help you get the policy you want in this blog.
What is GAP Insurance?
A GAP (Guaranteed Insurance Policy) is an insurance policy that ensures that customers are not financially liable in case of certain circumstances.If your vehicle is defined totaled or stolen, this policy will cover your out-of-pocket expenses. This is because you continue to owe more on the vehicle than it is worth.
Gap coverage helps increase confidence in the sale, reduces financial risk, and benefits virtually everyone.
While each person’s risk tolerance is different, shoppers who want a worry-free and secure ownership experience tend to opt for GAP car insurance, which is usually offered at the time of purchase for a one-time fee which is rolled into the monthly payment.
Apart from this, GAP insurance becomes more attractive when shoppers lease, put little to no money down, and choose longer lease and loan terms.
What are the benefits of gap insurance?
A car gap insurance policy is an excellent way to protect your wallet from potential financial loss.
Imagine your vehicle is defined as totaled in an accident and is worth $3,000 less than you owe. A gap insurance policy can help cover the difference.
Rolling over a negative equity vehicle into another loan or finance arrangement can offset some of these costs.
The insurance company may pay out a claim if the car has appreciated in actual cash value due to age or mechanical problems. Collectors often buy gap insurance protection to safeguard themselves against a potential loss of value.
Although gap coverage is unnecessary for everyone, knowing you’re covered if something happens can give you peace of mind.
What is the calculation for gap insurance?
A gap insurance policy is calculated by subtracting the car’s value from the amount you owe on its loan. Apart from this, you will need to consult your lender to determine the actual cash value of your car.
Here is how gap insurance protection can save you if your vehicle is totaled or stolen:
|Your vehicle’s actual cash value [A] – $25,000|
|Amount you owe on your vehicle loan [B] – $30,000
Gap insurance covers [B – A] – $5,000
As time passes, the amount of gap insurance coverage decreases. Once you reach a certain level in your mortgage, consider dropping this coverage.
What does gap insurance cover?
Several insurance plans offer gap coverage for replacing a totaled or stolen vehicle. When you file a claim, your comprehensive and collision coverage will pay your vehicle’s actual cash value (ACV).
If that is the case, your gap coverage may cover the difference between the ACV and the outstanding loan or lease balance. However, gap coverage may only cover a portion of your due balance if you owe more than the vehicle is worth.
A ar GAP insurance policy may incur finance or excess mileage charges. Also, GAP insurance does not cover damages to other property or injuries caused by accidents.c
How much does Gap insurance cost?
Your gap insurance costs will vary based on your unique circumstances. You’ll typically pay between $400 and $700 for a policy from a dealer, while a policy included with an existing policy will cost between $20 and $40.
The question is, is gap insurance worth it for a used or new vehicle? Well! It depends on whether you should purchase it and at what price.
- Vehicle depreciation
First, determine the depreciation value of the vehicle. Newer vehicles depreciate faster than older models, and new cars are the most expensive to insure because they depreciate rapidly.
- A specific policy
The policy type and coverage duration also influence the cost of gap insurance. Policy durations typically range from 12 to 72 months, but some policies may last up to 84 months.
A standalone gap insurance policy usually costs more because it does not receive discounts from insurance packages. Moreover, any deductibles and premiums associated with the policy will be considered.
How Does Gap Insurance Work?
If your vehicle is totaled, you will only receive payment from your collision or comprehensive insurance policy. A gap policy covers the difference between what you owe and what your vehicle is worth after it has been totaled. You can finance or lease gap insurance.
A gap insurance claim generally works like this:
- You’ll file a claim if you have comprehensive or collision coverage (whichever applies) and your car gets stolen or totaled in an accident.
- If you’re covered by car insurance, your company pays the actual cash value (ACV) minus your deductible. Let’s say your car is worth $20,000, and your deductible is $500. Your insurance would cost $19,500.
- Your gap insurance pays the difference between your loan or lease debt and your car’s insurance payout. For example, if your ACV is $10,000 and you owe $12,000, your gap insurance will pay $2,000.
- It’s a policy that covers the difference between your loan balance and your car’s value. Some lenders and leasing companies require gap insurance because it keeps customers from walking away from loans and leases if they total their cars.
A few gap insurance companies cover the full loan balance, including negative equity. Negative equity sometimes gets rolled into your new loan if you trade in a car. Thus, ensure you get a gap insurance policy covering negative equity.
It doesn’t matter if you own or lease a car; gap insurance is a must. When you buy a brand-new car, gap car insurance can be customized to fit your needs. A gap insurance policy may also cover the cost of a rental car if your vehicle gets stolen.
Make sure you ask about these extras when looking for gap insurance. Gap insurance makes sure you have enough money if something goes wrong.
Are you looking for someone who can assist you with the vehicle loan process so that you can secure your favorite vehicle without any hassle? If so, Carsfast can help. We offer various loan options to meet your financial requirements so you can easily buy a car.
Can I cancel my gap insurance?
You are free to cancel your gap insurance whenever you like. If you are leasing a vehicle, your company might require gap coverage. Also, if you sell a car or switch service providers, it is okay to cancel your gap insurance.
Can you get gap insurance after you buy a car?
There is no restriction on when you can purchase gap insurance as long as the loan or lease has not been paid off. However, some insurance companies do restrict when it can be purchased.
When does gap insurance not pay?
Gap insurance protects you if you owe more on your loan or lease than the vehicle is worth. In such a case, your insurance payout will not cover the loan or lease you are currently paying.
How long does gap insurance last?
When a car is purchased from a dealership, the gap insurance lasts for the term of the loan or lease, and when it is part of a standard auto insurance policy, it lasts for the term of the policy.
Do you need gap insurance if you have full coverage?
You may need gap insurance if you owe money on your car loan or lease but have full coverage. A full policy will not cover the difference between the loan balance and the vehicle’s actual cash value, so gap insurance is required.
What is a gap insurance dealer option?
A gap insurance policy covers the difference between what a driver still owes after a total loss or theft and the car’s value. Without gap total loss protection, drivers might have trouble paying off the remaining balance on a car they can’t drive.
What is a gap insurance addendum?
The gap waiver, also called the gap addendum, is a supplemental insurance policy for your vehicle. This policy covers the difference between the value of your car and what you owe on it when it’s defined totaled.
Do you get any money back from gap insurance?
The GAP insurance refund will reimburse you for some of your unused premiums if you cancel early. In most cases, this occurs after you have repaid your loan or sold or traded in your car before it has been paid off.