GAP Insurance Provides an Exceptional Value at $20 a Year
Clearsurance.com recently released an in-depth report on GAP insurance. Guaranteed Asset Protection, or GAP insurance, provides coverage for the difference between a car’s value and what the owner owes.
What is GAP insurance?
New cars depreciate quickly, and unless the owner makes a down payment of 20% or more, they will likely owe more than the vehicle is worth for a period.
For example, if someone’s car is totaled and they owe $25,000, but their car is worth $23,000, after filing an auto insurance claim, their insurance provider will only settle the claim for its value. That will require the owner to pay $2,000 back to the lender out-of-pocket.
GAP insurance ensures the owner won’t have to come up with the balance between an insurance settlement and a loan payoff.
How do insurers calculate a total loss?
Some states have set loss thresholds. While they vary from 50% to 100%, most are around 75%. Other states don’t have a set percentage, so insurers can determine their own limits.
So, if a vehicle worth $10,000 would cost $8,000 to fix, the repairs would cost 80% of the car’s value, exceeding the 75% threshold. In this situation, the vehicle would be declared a total loss.
But if a damaged vehicle costs 60% of its value to repair, the insurance company will typically pay to have the car fixed. Insurance will only cover a policyholder’s vehicle if the policyholder carries comprehensive and collision car insurance.
How do insurers calculate a vehicle’s value?
Insurers depend on a vehicle’s value to determine if they should declare it a total loss. And the vehicle’s value matters to the owner because that decides how much the insurance company will pay for the claim.
A car’s value is based on its initial value minus its depreciation. Insurers rely on Kelly Blue Book and NADA guidelines to determine value. In addition, a car’s condition and mileage will factor into the calculation.
For example, A car with new tires and a flawless interior and exterior will appraise for more than one with bald tires and rust spots.
What does GAP not cover?
Clearsurance.com explains that GAP insurance does not cover the following items:
- Insurance deductibles
- Late fees on a loan or lease
- Excessive mileage penalties on a lease
- Security deposits
- Extended warranties
- Down payments for a new car
- Carry-over balances from previous loans
Vehicle owners will be responsible for these fees, as GAP insurance only covers the difference between a vehicle’s value and what is owed to a lender.
Alternatives to GAP Coverage
Clearsurance.com lists several alternatives to GAP coverage.
- Loan/lease coverage
- New car replacement coverage
- Dealer protection
Determining which is the best option depends on the situation. Generally, dealer protection costs more than a GAP insurance rider added to a full coverage insurance policy.
For example, from the dealer, a GAP policy might cost several hundred dollars which usually gets rolled into the loan. Then, the borrower will pay interest on that cost. In comparison, GAP coverage from a car insurer costs about $20 annually.
Insurance companies often have programs that take the place of GAP coverage. For example, new car or better car replacement coverage will pay the cost of purchasing a new vehicle. If a policyholder has that type of coverage, there’s no reason to buy a GAP policy.
Progressive offers loan/lease payoff protection, and State Farm offers Payoff Protector. Both of these programs take away the need to purchase GAP insurance.
Read Clearsurance.com’s full report here: What is GAP insurance, and do I need it?