Guaranteed Asset Protection, or gap insurance, is optional insurance that kicks in if your car is totaled or stolen.
It essentially covers the “gap” between what you still owe on your vehicle and the depreciated value of the vehicle.
In this guide to gap insurance, you’ll learn how this type of insurance works, how much it costs, and when you should consider getting it.
In this guide, you'll get answers to the following Frequently Asked Questions about gap insurance:
What is gap insurance for?
How does gap insurance work?
How much does gap insurance cost?
Is gap insurance required?
How do I decide if I need gap insurance?
Is gap insurance really worth it?
How do you get gap insurance?
If you have a car loan, it is possible that your car may be or become valued at less than you owe on it.
This becomes a major problem if something drastic happens to your car. For example, if your car is stolen or totaled, the insurance company will typically only pay out what the car is valued at, not the amount that you have left on your loan, leaving you still making payments on a vehicle you no longer have.
Gap insurance kicks in when there is a gap between what insurance will pay and what you still owe on a vehicle.
For example:
Say you take out a loan for $20,000 on your new car, and a few months later your car is totaled while it is parked outside your house. You file a claim with your insurance company, and they agree to pay $17,000. The $3,000 difference is ultimately your responsibility, even though the situation was completely out of your control. If you have gap insurance, then you would file a claim and your policy would cover that difference.
Gap insurance ultimately works in conjunction with comprehensive and collision insurance to minimize or eliminate your out of pocket expenses.
Like everything, the cost of gap insurance can vary greatly between insurance companies.
The following variables will affect the cost of gap insurance for your vehicle:
Where you live
Your age
Your previous claims history
The actual value of your car
The total amount you owe on your car
If you go through your current provider, you can expect to pay a yearly flat fee of $500 to $700 for the coverage. If you finance through a credit union, you can expect a monthly add on of $20-$40.
At AutoApprove, we work with lenders to get the best rates on gap insurance possible, usually costing around $14 per month. As far as insurance coverage goes, it offers a great return on investment should you ever need it.
Gap insurance is not a required insurance, but may still be a good idea depending on your financial picture.
Some types of insurance are typically required by your state or your lender, depending on your location and situation.
Liability Insurance. This insurance is required by almost every state in the United States (excluding New Hampshire). It is composed of three parts: bodily injury coverage per person, bodily injury coverage per accident, and property damage coverage per accident. This covers any damage you may cause to another driver, their passengers, or their property, including their car.
Comprehensive Insurance. This covers the cost of damages to your vehicle if there is a non-crash accident, such as weather damage or theft. Comprehensive insurance also covers damage that occurs if you hit an animal.
Collision Insurance. This covers damages to your vehicle if you hit or are hit by another vehicle.
If your car is financed, you may be required to get all three types of insurance. Even so, it is possible that these policies may not cover all of the damages in the case of an incident, and you could end up still owing money on your car.
If your car is not financed, you do not need gap insurance. If your car is financed, it depends largely on the expected depreciation of your car.
It is important to remember that cars depreciate rather quickly, losing about 20% of their value in the first year alone. It is always worth checking Edmunds or Kelley Blue Book to see what your car is worth.
Here are some factors that can help you decide if gap insurance is necessary:
You put less than 20% as down payment on your car. This makes you more likely to end up with negative equity as soon as you leave the dealership. Your car depreciates the minute you leave the dealership, so if you only put down a low down payment, you might immediately owe more than the car is worth
Your car is a lease. Some leases require gap insurance in addition to collision, comprehensive, and liability.
You drive a lot compared to the average person in your area. This will cause your particular car to depreciate faster.
Your car model has a tendency to depreciate fast. Some cars simply lose value faster than other cars, while some cars hold their value extremely well. Gap coverage might be worthwhile if your car model doesn’t hold its value particularly well.
Your car loan repayment period is long. If your loan is 5 years or longer, there is a higher chance that your loan balance will exceed your car’s market value. Gap insurance can protect you from this depreciation.
If there’s a good chance your car will depreciate faster than you will pay it off, you should strongly consider gap insurance.
You will need to do the math to determine if gap insurance is worth the investment.
First, go online to determine how much your car is worth. Use sites such as Kelley Blue Book and Edmunds to get a value for your make and model. It is best to find an end of year value for each year of your loan.
Take a look at your loan terms. See how much you will owe each year, and compare this to what your car will be worth at the end of each corresponding year.
Calculate how much gap insurance will cost for each year.
Look at the difference in your car’s value and what you owe at the end of each year. Based on this, determine how much gap insurance will save you in the event of a disaster.
Guaranteed Asset Protection (GAP) usually comes with your loan or can be purchased from your lender. If your insurance company does not offer gap insurance, you can purchase it as a stand alone policy from another provider.
You can also add gap insurance when you refinance a vehicle.
Gap insurance is designed to cover what collision and comprehensive insurance do not cover, and can protect you against depreciation.
If you’re choosing to refinance your vehicle with Auto Approve, we will work with you to make sure your new loan includes any gap coverage that makes sense for you. We work with our network of lenders to get you competitive quotes, then help you choose the rate and coverage that best fit your needs.
