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GAP insurance

What is gap insurance?

Guaranteed Auto Protection alias GAP insurance is a kind of auto insurance policy that vehicle owners by to protect themselves from losses caused due to the compensation received after an accident or damage. When an accident happens, you may receive the “total required amount” or “only a part of the requested amounts”. When the compensation doesn’t cover the requested amount, you need a gap insurance policy. This situation happens when the vehicle loan is bigger than the actual book value of the car.

Here is a simple example to prove this scenario: You have a car worth 20,000 USD (according to blue book). Unfortunately, the owner owns a total of 25,000 USD on car payments. If the car is stolen or if it has met with an accident, the car insurance service provider would reimburse only 20,000 USD. Unfortunately, the amount required in 25,000 USD. In such situations, the vehicle owner will be short by 5000 USD. He will not have a car and he will not have adequate money in hand.

If the car owner has a gap insurance policy, the gap of 5000 USD can be covered easily.

How does gap insurance work?

As mentioned previously, gap insurance takes care of the gap between your vehicle’s actual worth and the amount you are hooked to after a collision. There is a gap of 30-days between your claim and the final reimbursement day. During this time, you can give your vehicle plenty of time to recover. If the waiting time exceeds 30 days, your standard insurance policy would come into the picture. Always remember, the GAP insurance scheme needs a fixed duration to be processed. If the wait is long and if your vehicle’s actual value plateaus with current market rates, you don’t need a GAP insurance. Unfortunately, the value of cars decrease rapidly and the GAP insurance becomes a useful investment.

Let us revisit the science behind GAP insurance policies:

  • You buy a car worth 50,000 USD.
  • You drive the car exhaustively and its value drops.
  • Today, the value of your car is only 35,000 USD.
  • When you meet with an accident, the auto insurance service provider will pay only 35,000 USD for replacement. That is because replacement insurance policies are designed to fulfil the market value. It doesn’t depend on the initial value of your vehicle or the loan amount.
  • Now, you will be short by 15,000 USD.
  • If you have a GAP Insurance policy, you can take care of this 15,000 USD easily. The GAP insurance policy will handle this amount for you.

Different Types of Gap Insurance Policies

There are several different types of GAP insurance covers. Before you choose a GAP insurance policy, you must be aware of these covers and their benefits. Verify if a gap insurance policy would suit all your requirements.

Insurance #1 – Return to Invoice GAP Insurance

Return to Invoice GAP insurance is a common plan for vehicle owners who want a lump sum payment. The insurance plan corresponds to the difference between the actual payout from the insurance service provider and the amount you have invested. With this amount, you can buy a brand new or a second-hand vehicle. However, new cars lose value at a faster rate than older cars. This is when GAP insurance doesn’t become useful. If you have a new car, the GAP insurance policy must be bought within three months.

Insurance #2 – Return to Value GAP Insurance

Return to Value GAP insurance is quite similar to the Return to Invoice GAP cover. These insurance schemes are for people who buy cars from dealers, not in the past three months. The insurance covers the value of the vehicle and the insurance payout.

Insurance #3 – Finance GAP Insurance

Finance GAP Insurance covers the amount you borrowed while buying a vehicle. The amount is paid to the finance company. If you are in debt, the remaining amount will be subtracted from your insurance payout.

Insurance #4 – Vehicle Replacement GAP Insurance

Vehicle replacement of New Car GAP insurance policy is one of the biggest coverage schemes in the industry. Unfortunately, this is the most expensive policies too! The policy focuses on mitigating the ever-rising cost of new cars. With this insurance policy, you will not receive any discounts from the car dealer. The policy covers the difference between the original price of the car and the payout. You may receive a little more to replace or buy a new car.

All these GAP policies last between one and five years. In most cases, the three-year policies are sold to vehicle owners. Before you decide on a duration, you should talk to your insurance service provider. They can help you decide on an ideal duration. In some cases, the longer plans would be more useful than the shorter ones. So, sit down, talk to your insurance service provider and make a wise choice. Also, discuss on the premiums and deductibles. Some insurance service providers will let you club the GAP insurance policy with your main car insurance plan. In such cases, it would be wiser to stick to these vehicle insurance providers. You will have a single insurance policy to cover it all.

What does gap insurance cover?

The very basic concepts behind GAP Insurance are easy to understand. However, you must be clear with what it covers and what it doesn’t cover. GAP insurance policies are predominantly versatile. You should be aware of the fact that it covers only vehicle damage and not bodily injuries. Here are few pointers on what is covered by the GAP Insurance policy.

Does the GAP insurance policy cover negative equity?

The answer to this is: Yes. Negative equity represents the gap between your car’s actual price and the auto loan. The amount can be covered with your GAP insurance plan.

Does the GAP insurance policy cover theft?

The answer to this is: Yes. You can use GAP insurance plans to cover theft if your car is stolen and never recovered by the local police force. To avail this cover, you must act as quickly as possible. When you act quickly, you have a better chance of bagging the full amount.

Does the GAP insurance policy cover natural disasters like floods, hurricanes, and tornados?

The answer to this is: Yes. You can use the GAP insurance policy to cover the total loss caused due to tornados, hurricanes, and floods. As mentioned previously, you must file the request as soon as possible. Approach your car insurance service provider at the earliest.

In very simple terms, the GAP insurance policy can be used to cover anything that is handled by the comprehensive or collision car insurance plan. In fact, the GAP insurance policy is designed to take care of all insurance deductibles too. This is what makes the GAP insurance scheme a useful and a wanted plan amongst car owners.

GAP Insurance doesn’t cover certain aspects. It doesn’t offer protection for the following:

  • You cannot cover vehicle repairs using your GAP insurance plan. The rental charges paid during vehicle repairs cannot be claimed using this coverage. You must use your conventional insurance plan or request a lender to help you.
  • All car payments that should be paid due to an event of death, financial hardship, disability or unemployment will not be covered by this policy. Once again, you should arrange for external funds.
  • When you sell your car or when it is repossessed, the loan balance or the vehicle value will not be covered by the GAP insurance. You must request the buyer or rebuilder to take care of the balance amount. On a very bad day, you might have to repay the loan from your pocket (even without the car under your title).
  • If you want to buy a new car and when you run short of the down payment amount, GAP insurance “cannot” help you. The policy is designed for a different purpose. You cannot use it to buy new vehicles.
  • If you have rollover balances from very old car loans, which are combined with new car loans, you cannot use GAP insurance to handle the rollover balances.
  • GAP insurance will not pay for extended warranties that can be added to your existing car loan.

How much does gap insurance cost?

By now, you will be clear on the benefits and drawbacks of GAP coverage. If your vehicle lease or loan has a negative equity, GAP insurance can help you. But, how much does GAP insurance cost? Does it benefits come for free? Before you explore into its pricing policies, you must not assume GAP insurance as a waste of your time or money. Even in a worst-case scenario, where your car is stolen, thousands of dollars required to replace your car can be obtained. You will be able to bridge the gap quickly and safely.

According to renowned car insurance service providers, GAP insurance policies can cost you between 5 and 7 percent of the total insurance premium.

For example, if your car insurance costs 1400 USD and if you are paying 420 to 600 USD for comprehensive and collision coverage – the GAP insurance plan will cost between 20 and 40 USD. The final cost of your GAP insurance plan will drop if your comprehensive and collision coverage goes down.

If you have paid a huge down payment for your brand new car, you don’t require a GAP insurance coverage. In such situations, you will end up paying more money every month. Always try to keep your loan payments to a minimum. You must never get this golden rule upside down. If your loan doesn’t have negative equity, you will not need a GAP insurance any day.

A lot of vehicle owners hunt for cheap GAP insurance policies. Well, you must always begin with your insurance service providers. Car dealers often come up with high GAP rates. These rates will be added to the final cost of your new car. On the other hand, insurance service providers offer cheaper premiums. The GAP premium can be combined with other policies like life insurance, home loans, and existing car loans. So, begin with your low cost auto insurance and not anyone else.

Gap insurance refund

GAP refund requests are common, but you will not receive a full refund after the car loan is paid off. When you pay the GAP insurance premium in advance, you will be entitled to a refund of the unused amount. If you have opted for monthly payments, you may not get a refund. If the policy was canceled early, you may receive a refund.

Here is a simple step-by-step guide on how to calculate GAP refunds:

  • Identify the monthly cost of your GAP insurance policy. You must divide the total cost of your insurance plan with its duration.
  • Identify the number of months remaining in your policy. Read your policy document and figure out when you would qualify for the prorated refund or full refund.
  • The monthly premium should be multiplied with the number of remaining months. This will give you the prorated refund value.
  • The net refund has to be calculated from the prorated refund value. To calculate the net refund: subtract the cancellation charges from the prorated refund value. The remaining amount will be the estimated refund.

GAP insurance refunds are bound by several terms and conditions. You must be clear with these terms and conditions, before signing on those dotted lines. Always verify if your insurance service provider takes care of the refunds.

When you cancel a GAP insurance policy, you are likely to receive a refund. Once again, lots of paperwork has to be done and your service provider will give you the details.

Gap insurance providers

In general, GAP insurance policies can be bought from dealers. But, there are several other options for buying the policy. Here are few common places to shop for GAP insurance:

  • Always begin with your car insurance company. Plenty of companies offer GAP coverage. If your current service provider offers GAP insurance coverage, don’t look further.
  • You can search online for GAP coverage.
  • You can approach a dealer and check if your vehicle can be GAP insured.

How to buy GAP insurance online?

As mentioned previously, you can search the internet for GAP insurance policies. There are numerous players with GAP policies. Every state has an online GAP Insurance service provider. They will provide you the coverage with conventional auto insurance policies. These policies are controlled by several terms and conditions. For example, GAP insurance has to be purchased with comprehensive and collision coverage. The terms and conditions differ from one provider to another.

Common terms and conditions around GAP Insurance:

  • GAP insurance is offered only to the lien holder or leaseholder of the vehicle. The lien holder or lessor must be a financial body. It cannot be an individual (private).
  • The coverage is activated only when the vehicle sustains total loss.
  • The coverage is the difference between the “vehicle’s value during the loss” and the “Actual cash value”.
  • GAP insurance can be purchased for both new and second-hand vehicles.
  • GAP insurance requires collision and comprehensive coverage.

How does gap insurance work after a car is totaled?

Before you understand how the GAP insurance works, you must be aware of what converts an accident into a total loss. If your insurance service provider sends you a message or mail, notifying that your vehicle is totaled, that means the cost to repair your damaged vehicle is more than the car’s actual worth. Most companies have inspectors and estimators to evaluate your vehicle. They will take photographs of your vehicle and provide “adjuster” estimates. The adjuster is responsible for assessing your vehicle during the accident. This value is known as the “Actual Cash Value”. It represents the replacement cost minus the “depreciation”. The Actual Cash Value is the amount your insurance service provider will pay you. Now, your car will be “Written Off”.

What is vehicle depreciation?

When you lease or buy a vehicle and drive it often, the car’s value starts to depreciate. That means, your car lease or loan amount is more than the actual worth of the vehicle. In general, cars depreciate at a rate of 11 percent. With every year, the car’s value depreciates by 15 to 20 percent.

Different types of vehicle total losses.

  • Leased vehicle total loss – when you lease your car, there are high chances of your GAP insurance being a part of the lease agreement. The insurance will protect your vehicle when something happens to the leased vehicle. If you are planning to lease a vehicle, always look for the GAP insurance clause in the contract.
  • Purchased vehicle total loss – When you buy a vehicle loan from a financial body, GAP insurance works differently. GAP insurance is not an integral part of vehicle loans. You must search through local insurance agents to get a quote. The quote depends on the agent and the state. GAP coverage handles only the market value of the car and the loan payoff amount. It will not touch your deductibles. You must handle the deductibles separately.

Is GAP insurance worth it?

GAP insurance is not for everyone! But, there are several benefits in choosing a GAP insurance plan. GAP insurance helps in the following situations:

  • If your vehicle is financed for more than 4 years. GAP coverage will give you additional protection if something goes wrong. Shorter financing periods will improve your overall loan to value ratio. The “GAP” between your vehicle’s current value and the original value will be covered.
  • If your car’s down payment is less than 20% its original value, you owe more than your car. If your car is stolen or totaled, the GAP cover will help you. You can pay off the loan using your GAP coverage.
  • If you have rolled out another loan, GAP insurance will help you when the car is totaled!
  • If you are planning to lease your own vehicle, you must buy a GAP insurance policy.
  • If you are planning to drive your car more than 15,000 miles every year, you must buy a GAP insurance policy.
  • If you have a single car for the entire family, and if you cannot afford to stay without the car, you must buy GAP coverage.

How do I cancel gap insurance?

The very first step in canceling your GAP insurance is finding your insurance contract. If you are unable to find the contract, you must contact the service provider. Read through the contract carefully. There will be disclosures on the front of your contract with details on whom you must contact to cancel the GAP insurance policy.

Next, you should fill a cancellation form. You should clearly mention the reason behind the cancellation. Before you sign the form, think through your financial situation. Check if you have an outstanding car loan. If yes, you must not cancel the GAP insurance policy. Try to keep the GAP coverage till your loan balance is lesser than the car’s value.

After the cancellation form is submitted, you will receive a prorated refund amount. The refund is subject terms and conditions. Check your contract for these terms and conditions. The refund will be made few months after cancellation.

It is very easy to stop your GAP insurance policy. At all times, read through the contract and understand where you stand.

Is GAP insurance worth it?

GAP insurance is a wonderful coverage that can protect your vehicle extensively. If you have a huge loan amount and very little cash in hand, you must opt for a GAP insurance policy. The policy will protect your vehicle and keep you financially stable. Car owners are aware of their vehicle’s worth. They get to know its actual value - the moment it gets driven a lot. This is when GAP coverage becomes handy.

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