The main reason we choose to purchase automotive insurance – other than most loan providers requiring it – is to protect ourselves from financial losses in the unfortunate event of accidents, theft or other unforeseen incidents. Unfortunately, even the most comprehensive standard policies have their limits, and the vast majority of drivers don’t discover these gaps in cover until it’s much too late. But that word right there – gap – also represents the solution: the aptly named gap insurance.
Without a doubt the biggest vulnerability your standard auto insurance policy exposes you to is vehicle financing. Whether you’re paying for your vehicle with a loan or a lease agreement, getting into an accident that results in your vehicle being totaled might leave you owing thousands of dollars on a car you can’t even use anymore. To avoid finding yourself underwater on loans and outstanding lease payments, you can opt for gap insurance.
What is gap insurance?
The aforementioned “gap insurance” is a supplemental type of policy that stands for Guaranteed Asset Protection. It was designed to cover the difference between what you still owe for your vehicle and the actual cash value (ACV) that your auto insurance policy would pay out in the event of a total loss. Whether your vehicle is totaled or stolen, this is the figure your insurance company will pay out. It’s based on the current market value of the vehicle, which factors in depreciation, something that is rapid and aggressive in vehicles.
For example, a vehicle loses up to 30 percent of its value throughout the first year of ownership alone. The issue here is that even if you total your vehicle after just a year of ownership, you might still have up to five years of payments to pay off, and the ACV is unlikely to cover very much of that thanks to all of that depreciation. This is where gap insurance steps in, covering the very gap created between your loan balance and the insurance payout.
How do drivers end up underwater on loans?
Regrettably, a lot of drivers out there believe they’re fully covered by their standard insurance policy, and it is until they experience a total that they realize what they’re up again. They’re forced to scramble to pay off a loan on a car they no longer even own, sometimes resulting in two different car payments if you have to purchase a new car right away. This is how a lot of drivers end up underwater on their loans.
What does gap insurance cover, and what doesn’t it?
As mentioned, gap insurance was designed to provide the crucial coverage you need if you have a financed or leased vehicle. It covers the difference between the remaining balance on your totaled vehicle and the ACV insurance payout, but there are a few things it doesn’t cover. Here are some examples:
- Unless specified, it won’t cover the deductibles from your standard policy
- If you have missed loan payments or have accrued late fees, these won’t be covered
- Lamentably, the costs of aftermarket accessories and upgrades won’t be covered either
Why do you need gap insurance?
Gap insurance is not a mandatory thing, but it is a highly recommended supplemental policy for anyone who owns or leases a vehicle. Here are a few specific examples of drivers who should definitely consider adding gap insurance:
- If you are financing a large portion of your vehicle’s cost
- If your loan or lease agreement has long terms
- If you own cars that are prone to even more rapid depreciation than normal.
We hope that all of this information has given you a better understanding not only of gap insurance, but of the risks you face by not having it. We have all kinds of stories and experiences dealing with car owners who have and haven’t had gap insurance at the time of a total loss here at Glover Family Independent Insurance, so we are uniquely qualified to help you find the best gap coverage for your situation. If you’d like to get started, don’t hesitate to contact us at your earliest convenience.
