If you’re not familiar with what GAP insurance is, or what it does and doesn’t cover, you’re not alone. Many consumers aren’t sure what GAP insurance actually is, and still others have never even heard of it. So what is GAP insurance all about, and should you have it?
Some people are misled by the name…GAP…which might imply that it closes the gap between what’s been covered and what hasn’t. First, let’s lay some rumors to rest.
GAP insurance does not cover everything that’s left over after your regular insurance has paid out to its limit. It won’t make your car payments if, for whatever reason, you aren’t able to. This is not true.
What doesn’t GAP insurance cover?
GAP insurance does not cover things like repairs to your car or a rental car while you’re waiting for those repairs to be completed. It doesn’t cover the value of your car or the remaining balance on it if it’s repossessed by the lien holder. It also won’t cover any additions to your original loan such as existing financial balances you may have rolled over into your car loan.
What does GAP insurance cover?
Here’s what GAP insurance is designed to do. It pays you the difference between what you may owe on your car loan, and what it’s determined to be worth by your insurance provider in the event it’s declared a total loss. That’s all it does; nothing more. So is it worth incurring the GAP insurance cost ? Definitely and here’s why.
The benefits of GAP insurance
Did you know that your car depreciates by at least 10% as soon as you drive it off the car dealership’s lot? It depreciates even more with each passing year. Factor in the amount of your car loan if you decided to roll the taxes and other fees rolled into the loan.
Believe it or not, your car loan could actually end up costing you more than your car is worth in a very short period of time; especially if you only made a small down payment. Here’s an example of how this could play out.
Example: Let’s say you pay $14,000.00 for a new economy car. You decide it’s easier for you to roll the taxes and fees into the loan because you can’t come up with all that money, and the balance of your loan is now $16,000.00. You can only come up with $1,000.00 so that’s what you put down, and your loan ends up being $15,000.00.
Fast forward 6 months. You’re involved in an accident and your car is deemed a total loss. Your insurance company determines the value of your car has depreciated, and it now has an actual cash value of $11,900.00. After your deductible is factored in (Let’s say that’s $500.00) you’re insurance provider cuts you a check for $11,500.00.
Even if you’ve made some payments on your loan it’s still going to be reduced by a few hundred dollars. So if your loan balance at the time of the loss is roughly $14,500.00, and your insurance provider only pays out $11,500.00 dollars, that leaves you with a balance on your loan of $3,000.00 for a car you no longer have. Dave Ramsey in his forums also addresses issues related to Gap Insurance with the fundamental thought being that Gap Insurance means that the the car was not worth as much as was owed on it and the insurance company will only cover what the car is worth
The difference in these figures is what’s referred to as the GAP, and this is the amount that GAP insurance covers. The GAP insurance cost may seem high, but in this scenario the financial investment in the additional coverage pays for itself and then some.
At the end of the day, it’s up to you to decide if GAP insurance cost is worth it. It’s a good peace-of-mind type of coverage that should definitely be taken into consideration.
Mary Ward enjoys helping consumers make sense of budgeting and insurance topics, like what you get for your money when you buy GAP insurance