Advantages Of Gap Insurance

July 6, 2009

The GAP in GAP Insurance is an acronym for, "Guaranteed Auto Protection." Nearly everyone knows that new cars depreciate once you drive off the lot. However, not many realize the extent of the depreciation. Your car loses up to 20% of its value, immediately after you take possession of it. If the vehicle is totaled in an accident, you'll suddenly realize that there is a gap between the actual value and the fair market value offered by your insurers. This gap could be thousands of dollars, and that's where GAP automobile insurance comes in.

Car value and GAP insurance are directly related to each other. A GAP insurance policy covers the difference between the actual cash value of a totaled vehicle and the current payoff on the vehicle. When a vehicle is involved in an accident and an insurance estimator determines that the cost of necessary repairs is in excess of the fair market value of the vehicle, the vehicle is totaled. In this case, the insurance company provides a benefit in the amount of the vehicle's actual cash value. In the event that a purchaser made a small down payment, or financed a large amount of negative equity, the actual cash value may be much lower than the payoff on the vehicle. In this case, the borrower is forced to use their own personal savings to pay the difference, unless the borrower has a GAP insurance policy.

GAP is a model of auto insurance that was born out of necessity. The necessity in this instance is the high cost of new cars, and the technical difficulties associated with calculating the actual versus the market value of cars. Consumers were (as usual) not on the beneficial end of these calculations. The introduction of GAP automobile insurance in the 1980's came as a response, to offer some protection to owners of new cars. Modern GAP insurance can cover your vehicle in a number of ways.

If your new investment in a car is threatened (for example, it's being written off), the market value that will be offered by your insurers will not equal 100% of your investment. That's where the protection of GAP automobile insurance comes in.
Gap insurance often includes clauses on theft or defacement, that can help safeguard an investment in a new or next to new car or truck. Take a look at specific policies, to see how a gap insurance "rider" fits into your existing collision, theft and comprehensive insurance setup.
GAP automobile insurance is separate from your regular auto insurance. GAP insurance covers you should the worst happen, and you find yourself struggling to make up the difference between the fair market value your insurance company offers, and the actual value of your investment.
Your leased luxury car or business truck might be worth more than your insurer will pay in the event of a claim. Price fluctuations often play a role in resolving claims, and many insurers find ways to lower their responsibility on basic liability claims. GAP insurance, and a solid understanding of the value that a driver needs to protect, can put a stop to the hassle of negotiating with insurers after a claim has been filed. Protecting a lease helps drivers protect themselves when they are driving a vehicle that costs more than they would have been able to afford on the market.
GAP automobile insurance could be optional or compulsory, depending on the circumstances. If you acquire your car through a direct loan, the choice of taking a GAP automobile insurance is up to you. Should you decide to take up GAP insurance at a later date, however, then the loan must be refinanced.

Gap insurance is necessary if you are making little or no down payment on your loan, if you are looking at a longer-term loan of between 60 and 84 months, or if you are financing a large amount of negative equity along with your vehicle. Borrowers who are in any of the above situations will find that they have little, no or negative equity in their vehicle, from the moment they drive it off the lot. As a result, if they were to get in an accident that totaled the vehicle, they would be forced to use their own funds to pay the difference between the market value of the totaled vehicle and the payoff amount. A GAP insurance policy, which costs between $500 and $700 from most insurers, will cover this amount, and keep you from relying on your own savings.

Auto Protect GAP Insurance
GAP automobile insurance is often paid in full at the time of your car purchase, but just like your regular insurance, you can choose to finance your GAP insurance over time. This is entirely up to you and what your provider offers. An auto protect GAP is a short term auto insurance. This simply implies that you are protecting your new investment in a car for a short period of time, within which you know you owe more on your car than it's worth.

There are certain criteria that make taking out short term auto insurance in the form of GAP automobile insurance imperative:

If you are financing more than 70% of the cost of car
If you're financing for more than 24 months
If you're driving in excess of 12,000 miles a year during that time

While not many people are aware of auto protect GAP insurance, and many might consider it a rip-off, it could actually save you thousands of dollars should the worst happen.

Understanding the Fine Print

Research figures about the percentage of people who read the fine print on all legal matters, including auto GAP protection, will shock you. Certain surveys have found that between 80 and over 90 percent of consumers do not take time to read the fine print of legal contracts.

Ask Direct Questions
Ask direct questions or seek legal interpretation of your auto GAP protection while your cooling-off period is still in force, when you can exercise your right to cancel. It is always better to cancel or renegotiate a GAP guaranteed auto protection policy, than to wait for the implications of the small print to be pointed out in the unfortunate event of an accident, when you are most vulnerable. Legal advice will save you a lot of trouble if sought before sealing the deal, or while you still have the opportunity to cancel. If you have any concerns at all, seek legal advice before you sign if possible or immediately after signing for this coverage.

Be Careful with Online Auto GAP Protection Purchases
Most of us purchase insurance policies online, auto GAP protection included. The ease of the process makes it virtually irresistible. You should, however, always look at all the legal details of your auto GAP protection, like how much protection you have, will be a direct reflection of the blue book value of your car.

For your sake and the sake of your creditors, you must pay attention to the fine print. The auto GAP protection negative equity serves to protect your creditors from the loss that could result from a situation where you owe more than your car is worth.

How Car Value and Gap Insurance Are Related

The actual cash values used when a vehicle is totaled are in a constant state of flux. The value of your model and trim level can vary on a weekly basis. These fluctuations are based on market conditions, availability of similar vehicles, wholesale transaction prices from auctions and the overall health of your vehicle's manufacturer. For example, when Chrysler LLC filed for bankruptcy protection in 2009, the projected cash values of Chrysler, Dodge and Jeep vehicles were lowered by between 4 and 5 percent. In this sense, your equity position can change overnight, if your manufacturer cuts dealerships, or is in a poor financial position. Your payoff varies each time you make a monthly payment, thus it changes at a constant rate. Because car values can change overnight, and your payoff stays relatively constant, GAP insurance is a good choice that helps you weather the ups and down of actual cash values in the event your vehicle is totaled.

Saving Money on GAP Insurance

The reason the dealership wants you to get GAP coverage is there is a real possibility that you can get into an accident. If this were to happen relatively close to when you drove the car off their lot, there is a distinct chance that you can owe them more money. Chances are you put as much down as you could on the vehicle. The insurance you have will cover the car's current value. However, there is likely a few thousand dollar difference that you will have to pay out of pocket, in order to cover the gap. There are some ways to save money when you buy GAP insurance.

Know the blue book value. The blue book value of your car is the wholesale price that an auto dealer will be prepared to pay for your car, as published by Kelley Blue Book. This means that your car will be valued as a used car. Even if it is one day old, it will still be valued as a day-old used car.
Don't purchase GAP insurance from the dealership. The dealership will want you to buy it so that you are protected. However, they will do one of two things. They will either try to increase your monthly payments to include the insurance, or they will sell it to you themselves. If you buy it from the dealership, you are only giving them more money.
Buy from mainstream insurance providers. Most insurance providers offer GAP, so call up your current provider and see if they can add it into your payments. It will undoubtedly be cheaper than the dealerships rates. GAP insurance at your dealership can cost up to $700, but it will be likely less than half that if you buy it elsewhere.
Shop around. If you think your current provider may be high, check around for rates from other companies. There are people competing out there to get your interest, so they are competitive with their rates. If you have good credit, you should have no problem finding better coverage rates. Also, if you have a good relationship that has lasted over a long time with a company, that can get you better rates as well.

Overall, GAP insurance can help you out in the event of an auto accident. It does not have to be a new car, although that is normally the case. About one in every three cars leased or purchased are "upside down loans," where you owe more than the car is worth. GAP insurance can save you from paying the difference between those two values.

Creative Commons photo by Daniel Case