In today’s article, we’ll discuss the benefits of gap insurance and what it generally covers. We’ll also talk about how it works. If you’re interested in gap insurance, you can call Malhotra and Assoc Insurance at 1-800-945-1410.
What is gap insurance?
Gap insurance, also known as guaranteed auto protection, is an optional insurance coverage that helps pay off your auto loan if your car is totaled or stolen and you owe more than the car’s depreciated value. It will help pay the gap between the depreciated value of the car and what you still owe. This coverage is only available if you’re the original loan holder/leaseholder on a new vehicle.
How does gap insurance work?
Here is a scenario that describes how gap insurance may work: You just bought a new car for $20,000. You still owe $15,000 on your auto loan when the car is totaled in a collision. Your collision coverage would pay your lender up to the totaled car’s depreciated value. You find out the car’s depreciated value is $13,000. If you do not have gap insurance, you would have to pay $2,000 out of pocket to cover the auto loan on the totaled car. However, with gap insurance, your insurer would help pay the $2,000.
In the example above, the reimbursement goes directly towards your lender to pay off a car that’s no longer driveable. If you would need help buying a new car after yours was totaled, you might want to consider purchasing new car replacement coverage. Some insurers sell this coverage with gap insurance together.
When do you need gap insurance?
You will need gap insurance within three years of buying a new car. Additionally, there are more requirements as to when to purchase gap insurance:
- You lease your car
- You took out a car loan of five years or longer
- You financed most of the car and made a small down payment of your car of less than 20%
- You rolled negative equity from your last car loan into your new car loan
- You bought a vehicle that depreciates in value faster than other vehicles
Do I need gap insurance if I have full coverage?
It is recommended you purchase gap insurance even if you still have full coverage. The types of insurance that go into full coverage do not cover the difference between what you owe on a loan/lease and the car’s actual cash value, like gap insurance does. Once you pay down the loan to the point where it’s worth more than you owe, you should remove gap coverage, so long as the terms of your lease allow it. In the scenario your car is destroyed, having gap insurance would not result in any extra payment.
What are the benefits of gap insurance?
There are many benefits of gap insurance, however, the most prevalent is the huge gap it would cover financially. Most gap policies protect new and used vehicles valued up to $100,000, losses up to $50,000 and deductibles up to $1,000. Secondly, gap insurance can be paid in many ways. It can be paid all at once, monthly, and you can even request a refund of remaining GAP payments from the dealership if you trade in your vehicle or pay off your loan early. Thirdly, gap insurance has one purpose: in case your car gets totaled.
Can I buy gap insurance at any time?
Most insurance companies will allow you to buy gap insurance at any time before a car loan or lease is paid off. Some insurance companies will sell coverage as late as 12 months after the purchase or after you’ve driven up to 15,000 miles. You typically cannot buy gap insurance for a car that’s more than two to three years old.
How long is gap insurance good for?
Gap insurance lasts for the length of the loan/lease when purchased from a dealership, and it lasts for as long as it remains on the policy when purchased from a standard car insurance company. Gap insurance is usually only needed for one to two years, since it’s useless when a car is worth more than the loan/lease balance.
About the Author: Alekha is an expert in the insurance space and has been with the Malhotra & Assoc. Insurance team since its inception. Alekha provides expertly researched and written content for the Malhotra & Assoc. Insurance Agency.