Gap Auto Insurance: Get It Right The First Time

Gap insurance (guaranteed auto protection) and loan/lease coverage might be two of the most significant vehicle insurance coverage options you haven’t heard about.

Most motorists assume collision and comprehensive coverage offers full protection if their vehicle is stolen or totaled. But if your new vehicle is financed or leased and you experience a total loss, you may be in for a shock.

Total loss – PLUS Suppose you just bought a brand new car or truck for $25,000. You put $1,000 down and finance the balance – $24,000 – over a five year period. You purchase the mandatory collision and comprehensive coverage with a standard $500 deductible.

Regrettably, a few weeks later your vehicle is hit by an oil tanker; you survive, but your car doesn’t.

You file a claim and your insurance provider notifies you they’ve settled on a payment of $21,000 based on your car’s actual cash value at the time of the accident. You think you’re in good shape until you find out from the bank the loan pay-off amount is $24,000 – $3,000 more than the value the insurance company assigned you car. When you add in the $500 deductible, you now have a hole $3,500 deep to dig yourself out of.

Also, if you choose to retain salvage (i.e., retain possession of the totaled vehicle), the salvage value may also be subtracted from the payout.

Gap insurance will help you dig out of that hole Gap insurance covers the difference between what you still owe on the car and what your insurance company says it’s worth up to 125% of the MSRP.

How long do I need gap coverage? The moment the car salesman hands you the keys to your new car its value depreciates by 22% on average. If you made a 5% down payment you already owe 17% more than your car is worth. If you combine a low down payment with an extended, 5-7 year loan term, you should plan on living with a gap in your coverage for 2½ to 3 years. However, for the reasonable sum of around $30 a year, the additional gap protection is hardly a financial burden.

Once the equity in your new car, truck, or motorcycle catches up with the vehicle’s actual cash value you are free to call your gap insurance provider and tell them to drop the gap portion of your coverage.

On the other hand, gap insurance purchased at a dealership can run as much as $500 – $700 and cannot be canceled once the contract is in force. So after 2 or 3 years you’re essentially paying for something you don’t need, and can’t use anymore.

To find out when the value of your car and loan balance reach parity you can periodically check your car’s value at and compare it to the loan pay-off amount available on your bank’s website.

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