Guarantied Asset Protection insurance covers what is known as gap insurance, which is highly specialized in nature and is designed to help car owners not bear the full brunt in case of a total loss. This insurance is most beneficial to those who have financed or leased new vehicles. Knowing what gap insurance is and if you need it can help in making informed decisions regarding your policy on auto insurance.
The moment you drive away in your new car, it starts depreciating. Then, there is the fact that most cars lose 20% of their value in the first year alone. That kind of depreciation can have you owing more on your car loan or lease than the car’s current market value. If a car is completely destroyed in the accident, totally by either bringing damages beyond repair or even theft, the traditional insurance company pays for the actual cash value and not a penny more, so this is where gap insurance comes to play.
Excess policy, in turn, pays off the difference between the ACV of your car and the remaining balance of your loan or lease. For example, let’s say that your car is totaled, but its value is considered to be at $20,000, and therefore, you have a transferable loan of $25,000. The gap policy would then cover a gap of $5,000 between the two amounts. Now, without that gap policy, you would need to find the money yourself to pay the extra, even if you were no longer with your personal car.
Gap insurance is more valuable to those who have just bought a new car, with little or no down payment especially, because at the onset of the car’s life, they are likely to be in a position where they owe more on their loan than the car is worth. Gap insurance is also good for those who take out a long-term loan, as these tend to have very slow equity buildup—big gaps between what is owed on the loan and what the car is worth. Also, gap insurance can be helpful for vehicle models that have high rates of depreciation, as the gap between the particular car’s value and the loan balance can be huge within a very short period.
It is worth noting that gap insurance is not needed by all. If you made a large amount down on your car when you bought it, or you have managed to pay down well on your loan, then there’s likely to be only a small gap between the two amounts—your current loan balance and your car’s value. In those circumstances, the expense of paying for gap insurance may not be worth the stretch. Additionally, most auto insurance policies or leases include gap coverage, so it is important to check with your current coverage before purchasing a separate gap insurance policy.
It’s also important to know a gap insurance policy in its finer details. Some of these gap insurance policies could be limited where they could not cover late payments, leasing penalties, or even extended warranties. Read between the lines and ask questions to know exactly what’s covered and what’s not.
In summary, gap insurance is a nice idea, especially to a person who has a new car with financing or who is leasing one, when your loan balance is way more than your car’s value. It is really going to protect you by covering what your car is worth against what you owe on it in case of a total loss. However, very important to note is you should asses your financial stand and what you already have in coverage so you can be in a position whether you really need Gap insurance or not.