What's Gap Insurance and Why You Should Get It

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Getting an auto insurance policy is a cost-effective investment because it protects car owners against financial losses in the event of theft or an accident. In exchange for paying a premium, insurance companies provide coverage for property damage, medical expenses, and legal liabilities. 

However, there are instances when an auto insurance policy isn't enough to cover the expenses incurred in a vehicular accident. When this happens, the car owner ends up spending thousands of dollars and experiencing a lot of stress. 

In some cases, severe vehicular accidents can cause bankruptcy and even mental health problems, such as anxiety and depression among car owners. 

Car owners should exhaust resources to protect themselves from financial losses — this is when knowing what gap insurance is becomes critical. Gap insurance guarantees that car owners spend the least amount of money when their car gets involved in collisions or theft. 

This article will cover the following topics so car owners will know more about gap insurance:

  1. What is gap insurance?
  2. Situations where it’s best to get gap insurance
  3. How much does gap insurance cost?
  4. What are the three types of gap insurance?
  5. What are common FAQs about gap insurance?

 

What Is Gap Insurance?

Simply defined, gap insurance is an optional car insurance coverage that helps pay off auto loans if the vehicle is stolen or totaled, and the car owner owes more than the car's depreciated value.

Also known as guaranteed auto protection, gap insurance helps cover the expenses between the depreciated value of the vehicle and what the car owner still owes on the car. 

To set an example of how gap insurance works, consider Peter's car, which is worth $20,000. Peter still owes around $25,000 worth of car payments. If Peter's car is completely written off because of theft or an accident, Peter's car insurance policy will reimburse him with $20,000.

Because Peter still owes the car financing company around $25,000, he will end up being $5,000 short, even though he no longer uses the car. The gap insurance policy will cover the $5,000 "gap" or the difference between the amount still owed on the car and the money received from disbursement.

 

Situations Where It's Best To Get Gap Insurance

As mentioned, gap insurance is an additional car insurance policy, not a requirement. This means that car owners always have the option of whether to get gap insurance or not. 

However, there are instances when it's best to secure gap insurance as early as possible.

Car owners will make the most of the following situation if they have gap insurance:

  • They Financed a Car and Made Little to Zero Down Payment - Without making a significant down payment, car owners will usually wait for years before their loan amount, and the car's actual value starts to balance. During theft or accident, car owners will likely end up paying thousands of dollars without gap insurance. 
  • They Traded in an Upside-Down Car - When individuals trade in an upside-down car (cars that are priced higher in loans than their actual value in the market), expect that dealerships will still add a certain amount to the loan balance of the new car. This extra balance can result in a financial burden and will haunt the car owner, especially when the vehicle is stolen or totaled. 
  • They Bought a Car With Bad Resale Value - Buying cars with bad resale value will likely put anyone in an upside-down situation. The car owner will pay more money for their car loan than the actual value of their vehicle. 
  • They Plan To Put On Miles Quickly - Cars naturally depreciate but putting on miles quickly can reduce its value faster. The faster a person racks up the miles, the faster their car depreciates. As the value of the car depreciates, the car owner ends up paying more money for their car loan. 

 

How Much Does Gap Insurance Cost?

Gap insurance provides many benefits, but it's essential to understand the costs before getting one. Getting gap insurance without knowing the price will only have adverse effects on one's financial health.

 

According to the Insurance Industry Institute, one can add gap insurance to their regular comprehensive auto insurance policy and pay for as little as $20 a year. However, the cost of the gap insurance will vary depending on many different factors, namely the state, age, and driving record of the policyholder and the vehicle's model. 

 

Generally, insurance companies will price gap insurance around 5% to 6% of an auto insurance policy's comprehensive and collision premiums. So, for example, if a policyholder pays $2,000 every year for those two mentioned coverage, they have to add around $100 to $120 to get gap insurance. 

Bank Rate Monitor suggests that going to an insurer to get gap coverage is cheaper than going through a lender or dealer. Many insurers offer gap insurance today, making it easier for anyone to afford this additional coverage.

 

What Are the Three Types of Gap Insurance?

There's no such thing as "one size fits all" when it comes to gap insurance. There are different gap insurance products available today, which is why interested individuals should identify how these products are different from each other. This will allow any car owner to determine which gap insurance product best fits their needs. 

Generally, gap insurance comes in three different types, namely:

  1. Combined Return to Invoice GAP

This type of gap insurance covers the difference between the insurer's "total loss payment" and the outstanding finance settlement, or the original price paid for the vehicle — whichever is higher. 

This gap insurance product is suitable for car owners who can make cash purchases (like personal loans) and has finance agreements where the policy owner can own the vehicle. 

Note: Although beneficial, this type of gap insurance needs to be bought within a set number of days. 

  1. Agreed Value of Return to Value GAP

Agreed value or return to value GAP covers the difference between the insurer's maximum settlement payment and the value of their vehicles during their purchase. This type of gap insurance is usually aimed at car owners who invested in second-hand cars. 

Note: This type of gap insurance is available for car owners regardless if they bought the car from a private seller or dealer. 

  1. Combined Vehicle Replacement GAP

This type of gap insurance covers the difference between the insurer's total loss payment and the expenses associated when buying a brand new car of the same make, model, and specifications. 

The combined vehicle replacement gap is ideal for car owners who can make cash purchases and buy models that have been heavily discounted, and a replacement model could be more expensive. 

Note: This is one of the most expensive types of gap insurance and is ideal for car owners who purchased their vehicles at a discount.

 

What Are The Common FAQs About Gap Insurance?

Since gap insurance requires a certain amount of money, it's important for car owners to have in-depth information on how this coverage works. It will be easier for them to determine whether this insurance is suitable to their needs and budget if they know more about this kind of insurance. 

Listed below are some brief yet informative answers to some of the most commonly asked questions about gap insurance. Anyone interested in getting gap insurance should read this section below to fully understand the pros and cons of the insurance.

 

Is gap insurance worth it?

For anyone who owes more on their car loan than what it is currently worth in the market, gap insurance is definitely worth every dollar. The premiums one will pay for their gap insurance will save them from financial burden and a lot of stress the moment their vehicles are stolen or totaled. 

For individuals who put down less than 20% on their car loans, getting gap insurance is a wise investment, especially for the first years of car ownership. By then, the policyholder will owe less on the car than it is actually worth. 

 

If the car is stolen or wrecked, the policy owner will not have to pay out-of-pocket to cover the gap between the vehicle's insured value and the amount they owe to their lenders.

 

Do I still need gap insurance even if I have full coverage?

According to statistics, over 215 million dollars have auto insurance in the US, yet many of them still end up paying out-of-pocket expenses after their car was involved in a collision.

Comprehensive auto insurance provides full coverage because it includes collision insurance and every unexpected calamity that can damage a car, from flood to vandalism. Although beneficial, comprehensive auto loan insurance pays the vehicle's actual cash value, not the amount that a person still owes on the loan or the price they've paid for the car. 

Gap insurance covers the difference between these expenses. 

So, in short, gap insurance is necessary if there is a "gap" between what the car is worth and what the policy owner owes on loan. The discrepancy between the two typically happens during the first years of car ownership because cars depreciate faster than how the loan balance is shrinking. 

The policyholder can always cancel the gap insurance once their loan balance is low enough and covered in full under their collision insurance payment.

 

What does gap insurance really do?

Gap insurance is like a supplemental insurance policy for car loans.

Gap insurance will make up the difference if a vehicle gets wrecked or stolen, and the comprehensive auto insurance policy pays less than what the policy owners owe the lender.

 

How can I get gap insurance?

There are many ways to get gap insurance, but the easiest and cheapest way is by asking an auto insurance company. Most auto insurance companies will gladly add gap insurance to any policy holder's existing policy.

 

Some car dealerships will also offer a gap policy, but the premiums are usually more expensive than major insurers. Nevertheless, anyone interested in getting gap insurance from their car dealership should check first because some auto deals build gap coverage into their pricing. 

 

Anyone interested in getting gap insurance should weigh their options first. They should look at different service providers to determine which among these provide the best deal.

 

Can I get gap insurance after buying a brand new car?

Yes, definitely! New car owners can call their auto insurance company and inquire if they can add gap insurance to their existing policy. 

The insurer will inform the policy owner of their options and how much gap insurance will cost.

 

Which types of vehicles are eligible and not eligible for gap insurance?

All motorized vehicles licensed for street use are eligible for gap insurance, such as:

  • Autos
  • Pickup trucks
  • Vans (up to one-ton capacity),
  • Motorcycles

However, commercial vehicles, vehicles for hire or rent, and trucks with more than one-ton cargo capacity aren't eligible for gap insurance.

In addition, emergency vehicles, vehicles used for racing, dune buggies, and luxury vehicles like Rolls Royce, Tesla, and Porsche are also not eligible for gap insurance.

 

What's not covered with gap insurance?

Gap insurance is an additional insurance policy, which means that it doesn't supersede any auto insurance policy coverage.

Gap insurance doesn't cover damage from a car accident, medical bills caused by bodily injury or death, or property damage.

 

Do I get money back from gap insurance?

Policyholders may be entitled to a refund of the unused portion of their gap insurance if they were able to pay off the auto loan early. Some states also require insurers to refund the premiums if, for example, someone was able to pay a 36-month loan with gap coverage for 20 months. 

However, there are instances when the insurer will not inform the policyholder about the refund. To prevent this situation from happening, policyholders should always keep their payoff letter, an odometer disclosure statement, and the original contract. 

Policy owners are also encouraged to know more about the insurer's refund policy before getting gap insurance. Policy owners can also contact their local insurance commissioner's office to learn about the local rules and regulations beforehand.

 

Work with 121 Financial Today!

Getting gap insurance will save car owners resources if their vehicles are involved in theft or collisions. This is one of the biggest reasons why gap insurance is a must for every car owner. 

We at 121 Financial Credit Union pride ourselves in helping our clients make smart money decisions. 

We also offer many financial services, such as online and personal banking, home and auto loans, and financial planning. Just contact us at (904) 723-6300, and we'll be happy to provide information about our services and how each of these can improve a person's quality of life!

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