GAP Insurance: Is it Worth It?
Many consumers believe that if they were to get into a car wreck that totals (i.e. cases where it is more expensive to repair the vehicle than the vehicle is actually worth) or their car or their car was stolen, their automobile insurance would cover all costs.
However, this is not always the case. Insurance companies will cover some costs but will only cover costs relating to the automobile’s current market value.
Because the value of a car depreciates very quickly, it may come as a shock to find that the insurance isn’t quite covering everything they thought they would. GAP insurance may remedy that.
What is GAP insurance?
What exactly is GAP insurance? GAP insurance, or Guaranteed Auto Protection (GAP) insurance, is an optional insurance that can be purchased to cover the costs between what you owe on an automobile loan and what your insurance would pay (usually the current market value) should your vehicle be damaged, stolen, or totaled. This especially applies to new vehicle purchases or cars that are under one year old.bankruptcy lawyer can tell you if you qualify for a chapter 7 or 13 bankruptcy.
Scenario
For example, say you just bought a new car for $35,000 but it was totaled within a year. After further analysis, your car insurance determines that your vehicle’s current market value is only $28,000. Having GAP insurance would cover the extra $7,000 balance on your loan rather than you having to pay it out of pocket.
It’s important to note that this insurance is optional. If someone tells you otherwise, ask to see a contract or policy that shows where that requirement is legally required. Companies may offer something as GAP insurance when in reality it’s actually a debt waiver agreement that may be marketed as GAP insurance. Or they may include GAP insurance for free as part of a lease contract. Many car dealerships make profits from their version of GAP insurance coverage and charge a hefty fee for it and some states even make selling GAP insurance a requirement. Read everything carefully
A bit of research regarding your vehicle of choice and your insurance policies is a worthy investigation that may save a great deal of money. It is also important to factor in upfront costs as well as interest rate costs when researching options..
Get the Facts
Some auto companies and financiers may insist that a GAP plan is needed in order for the financing to be approved. Check with the lender specifically to verify if this is necessary. If so, “…the cost of the GAP insurance must be included in the finance charge and reflected in the disclosed annual percentage rate (APR),” according to the Consumer Financial Protection Bureau (CFPB), a U.S. government agency that works towards consumer safety in relation to financial institutions. “GAP insurance can be excluded from the finance charge and APR if it is optional,” advises CFPB.
Some dealerships will automatically include GAP insurance in their leasing contract when leasing a vehicle. The CFPB suggests checking with your state commissioner or your insurance agency to further discuss concerns or issues. They are specialists and have the resources to go into specific laws regarding your state. There are several options of GAP insurance to choose from, so submitting several quotes and doing your research goes a long way to get the best rates.
Is GAP insurance worth it?
With that being said, is GAP insurance worth it? It’s no secret that a car’s value depreciates as soon as you drive off the car lot. According to Edmunds, the average car depreciates 11% once it is out of the dealership. Within the first year, your new car will have lost nearly 20% of its market value! Knowing this and knowing that the insurance would only pay the actual cash value should something happen could be the ultimate deciding factor.
What about in the case of a lease?
You may be thinking that loan or lease coverage could do the same thing without the costs. However, loan and lease coverage are only applicable for a certain percentage of your car’s current market value. For instance, your insurance may decide to cap their loan or lease payments at 25% (the average rate for most insurers). If that were their policy, then they would pay the difference between your lease or loan and your car’s true market value, but only up to 25% of that value. You will be held accountable for the rest of the difference between what insurance covered and what you still owe.
You must still make your car payments
It’s important to note that GAP insurance won’t cover missed car payments due to extenuating services, car repairs, costs related to car repossession, rental vehicles, payments for a new car, or additional warranties. The sole purpose is to cover the monetary relationship between what the insurance deems as the current market value and what the lender says it still owed.
If you’ve recently purchased a financed vehicle, it’s best to check that the vehicle’s current market value is in alignment with the auto loan. If the amount you owe is greater than the amount the vehicle is worth (also known as being in the “upside down”), it would be wise to speak to an agent about adding GAP insurance. Being upside down isn’t uncommon and insurance companies should know to guide your decision. Additionally, keep track of your vehicle’s value and your vehicle’s financial balance. When the amount owed is less than the amount the vehicle is worth, you can cancel the GAP insurance.
GAP insurance does vary from location to location. Some policies cap their coverage to $50,000 or limit how many months are allowed coverage (usually around 80 months).
How Does Gap Insurance Work?
Let’s analyze a few scenarios to help better understand what having GAP insurance would do versus not having GAP insurance and what is the smartest choice.
For example, if there is an accident and your insurance deems your vehicle is totaled, the insurance will only pay the equivalent of the current value but won’t pay for anything still owed on your auto loan. This is where having GAP insurance would be most beneficial. The GAP insurance would help with the loan costs that the auto insurance won’t cover by wiping the loan clean (although it won’t cover interest charged, late fees, or missed payments). If you didn’t have GAP insurance, you would have to keep making payments on a now defunct car that is sitting in a shop (or a junkyard).
Let’s break an example down further. The following example from The Office of the Insurance Commissioner in Washington State provides a clearer way of viewing how GAP insurance works:
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Auto loan balance on a brand new vehicle: $30,000
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Actual cash value at time of accident: $25,000
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Payoff without gap coverage: $25,000 (minus your deductible)
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Loan amount you still owe: $5,000
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Payoff with gap coverage: $25,000 + $5,000
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Loan amount you owe: $0
As was briefly mentioned above, consumers who are leasing cars will likely have GAP insurance added or automatically included to their policy because most insurance companies have limitations on what they cover. On a new car that is leased, the true market value is highly likely to be lower than what is owed on the car, hence the need for the GAP policy. Regardless of whether the vehicle is leased or not, making payments on an expensive inoperative machine is no fun.
What about fully owned vehicles?
Of course, if you already own your vehicle or owe less on your loan than your car is currently valued at, you wouldn’t need to purchase GAP coverage. You also wouldn’t need it if you bought the car from a car dealership but were able to lay down a substantial down payment. Additionally, GAP insurance should only be in your policy for when you need it. It doesn’t make sense to keep paying for something that no longer benefits you. However, it is easy to lose track of things, especially with services like automatic withdrawals from your paycheck and recurring payments.
Some companies will inform their customers when the GAP insurance is no longer necessary. It is probably wisest to be aware and check from time to time to make sure your money is going towards something beneficial. Also if you sell your vehicle or end up refinancing your loan and were able to pay your GAP insurance premium fees upfront, you may be eligible for money back.
What companies are GAP insurance providers?
Most insurance companies offer some sort of GAP coverage, and it is usually best to get quotes from several and then compare the ins and outs of the plans.
It will obviously vary between states and even countries regarding which insurer has the best rates. The best way to determine a good GAP insurance provider for you is to start your search online, ask for quotes, and branch out as you get more information. Your provider may already have a good rate that can be easily added to your existing coverage plan, but it is always good to shop around to get the best rates.
Who best benefits from GAP insurance?
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Consumers who are purchasing new or fairly new vehicles.
This goes without saying that the extra protection provided with GAP insurance can be a major source of comfort in your newly purchased investment.
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Those who have put smaller down payments on their new vehicles.
A smaller down payment due to a larger loan can become money down the drain without GAP insurance. Smaller down payments are often considered to be less than 25%.
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People who are buying a higher-end or luxury vehicle.
Assurance of coverage after a great expenditure is wise.
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Consumers who don’t have the means to pay the costs for the loan should something go awry.
Many people would not be able to afford to cover these out of pocket and with the depreciation value of vehicles so drastic, it makes sense to consider GAP coverage.
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Those who have traded in their upside down vehicle for another vehicle and have the loan added to their new vehicle.
The last thing you’d want to risk is being without a vehicle and owing thousands of dollars on two defunct vehicles.
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Consumers who travel or plan on traveling great distances in a short amount of time.
This goes back to the car depreciating with value due to the mileage.
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People who have a long loan term agreements (usually over 48 months).
The breaking even point is longer to get to in situations like this and it would be beneficial to pay a little extra to have the coverage.
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Those who purchased vehicles that depreciate faster than other vehicles.
The Nissan Leaf, Mercedes-Benz S Class, Chevrolet Impala, BMW 7 Series, Lincoln MKZ, and Volkswagen CC are some of the cars that have the highest depreciation rates.
With such an important purchase, it makes sense to at least consider adding GAP coverage to your insurance plan. It’s a risk not to do so, especially when the value of the vehicle only declines. Overall, the best way to get accurate rates and information is by talking to your automobile insurance agent. Not all agents are the same and shopping around, asking questions, and taking the time to research will be in your best interest.