When you purchase a vehicle with a car loan, total wreckage or theft may be one of the most significant losses you might incur. That’s because even if you have car insurance, most policies won’t cover these types of loss or damage. Fortunately, you can solve this problem by getting Guaranteed Asset Protection (GAP) insurance. That said, read this essential guide to gain further insight.
GAP Insurance Defined
GAP insurance is commonly known as guaranteed asset protection, lease assistance coverage, loan assistance coverage, or gap waiver. Its role is to help cover the balance on your auto loan when it’s stolen or damaged. Without this insurance, you have no choice but to pay your remaining loan balance, even when your car is no longer operational. So, before shopping for this type of coverage, you may consult with your insurance providers or lender about how to know if I have GAP insurance.
You may still require GAP insurance even if you have collision and comprehension coverage. Since these two former insurance types may only pay you up to the fair market value, policy’s coverage, or actual cash value (ACV) during the incident. One drawback of these insurance types is that they may not be able to cover the remaining balance of your auto loan. Further, it is pointless to make the loan repayment if you no longer possess the vehicle.
The Importance Of Gap Insurance
You might not need GAP insurance if your car’s value exceeds what you owe on your auto loan. So, it would be best to determine your car’s true market value by factoring in its age, mileage, and condition. Then, compare it to your remaining auto loan balance to know which is higher.
There’s a need for GAP insurance if the loan amount is greater than the vehicle’s value. That’s because the amount you get from your auto insurance policy after an accident is all your vehicle is worth.
During the early years of your car loan, it’s common to owe your leasing company or the lender more than what your vehicle is worth. You may not yet feel the burden of paying your lender a long loan or lease period after a small down payment. However, your monthly payment adds up when the car’s equity is insufficient.
That said, car equity refers to its current value, which must equal the equity of claims you’re filing. This means that in an accident, your insurance company will only compensate you for the car’s actual cash value, no matter how much you paid for it. The problem here is that, as time passes, a car’s value depreciates.
The Cost Of Gap Insurance
However, you should consider if you can afford the cost of GAP insurance as an additional coverage for your car insurance premium. When computing your GAP insurance premium, the insurer will consider the previous car insurance claims, state of residence, the applicant’s age, and your car’s ACV. Generally, it’ll amount to 5%-7% of your collision and comprehensive insurance premium.
You can include GAP insurance in your lease contracts or pay a flat rate fee of USD$400-$600 to a car dealership. But if you want a lower cost, you may get less than USD$200 GAP insurance at credit unions. Wherever you choose to get your GAP insurance, most insurance providers will only allow you to avail it if you have collision or comprehensive coverage.
Coverage Length Of GAP Insurance
While most GAP insurance covers three to five years, you can choose the cover length that fits your preference. You may even have more extended coverage, but it’ll still be up to your provider. But generally, the provider will consider the age of your car and the type of cover you buy when calculating the coverage length of GAP insurance policy.
The Maximum Claim Limit
Besides the coverage length, you can also choose the maximum amount of claims or claim limit of your GAP insurance provider. For instance, your claim limit is USD$1,000. Even if the shortfall between the price of the car and the insurance payout is higher, the provider for your GAP insurance will only pay you USD$1,000.
That’s why you should aim for a suitable amount so you won’t waste your money on unnecessary coverage, but it should be enough to meet your needs. Primarily since the cost of the policy will also depend on the claim limit. However, it may still be better if you shop around to compare various providers, as some may have higher claim limits.
The Key Takeaway
If you want to maximize your payout in a car accident or theft, GAP insurance is something to consider. In the event of such an occurrence, you can utilize the insurance’s claim limit to pay off the remaining balance of your loan. If you still owe money on your car loan, you can save costs with this method.
