When you purchase car insurance for your vehicle for the first time, the dealer will ensure you have automotive insurance before you pull your vehicle off the lot. Although you may only think you need collision and liability insurance, you may need gap insurance. What is gap insurance, and why would you need it? Read on for more information. 

What is Gap Insurance?

Guaranteed Asset Protection Insurance, or gap insurance, is optional insurance coverage. This coverage helps you cover any gaps between the amount you owe your lender and the actual value of your vehicle. 

For example, if you owe $25,000 on your vehicle and you have an accident where you total it, your insurance company will only pay the Blue Book value of your car minus your deductible. If your vehicle is only worth $20,000, you will still owe your lender an additional $5,000.

If you have gap insurance, your policy will pay your lender the $5,000 minus any deductible you may have on your gap policy. In this scenario, you would only be out the cost of your deductibles. If you do not have gap insurance, your lender will expect you to continue to make a loan payment on a vehicle you no longer have. Some lenders will require the balance in full since you no longer have any collateral to secure the loan. 

Many dealers sell gap insurance as a stand-alone coverage, but you can find better value with your insurance agent. A gap policy can be relatively inexpensive when bundled with your collision and liability insurance. But the actual cost of a gap policy depends on several factors. These include:

  • The cash value of your vehicle (ACV)
  • Your age
  • Your address
  • Your insurance claim history

Your insurer will calculate the cost on a policy-by-policy basis. 

Who Needs Gap Insurance?

There are several scenarios where you may want to purchase gap insurance. These include the following:

  • When your loan value is higher than your cash value
  • When your lender requires it as a condition of your loan
  • When your lease requires it

Some lease companies automatically include gap coverage in the lease price of your vehicle. 

Only some people need gap insurance. If you place a substantial down payment on your vehicle, the actual cash value of your vehicle may always be higher than the amount you owe. 

What is not Covered?

There are some things gap insurance will not cover. These include:

  • Extended warranties
  • Carry-over balances from previous loans
  • Lease penalties
  • Security deposits
  • Deductibles

For more information on auto insurance, contact a company near you.