GAP Insurance Basics – Quick Guide to Purchasing GAP Insurance

Gap insurance, also known as gap protection, covers the difference in the amount that you owe and the amount that the car is worth.

Usually, a general policy covers the cost of repair or replacement of a car in case of theft to the total value of the car, but if there is a difference in the total market value of the car and the amount owed on your car loan then that difference or “gap” is not covered by the insurance company. The gap protection is essentially a debt cancellation agreement that covers the difference between the value of the vehicle and the vehicle loan.

The value of a car is sometimes less than what you owe on the loan due to certain factors like depreciation, taking a loan that has an extended term and borrowing more than the purchase price. In such a case, if the car is damaged, the insurance company will not pay more than what the car was worth before the accident. The situation in which you need gap insurance is known as going “upside down”.

A common scenario where you need gap protection is when buying a new car. Before you buy gap insurance, you must make sure you are not already covered because some companies include the coverage in the agreement for their own protection. Most states offer gap protection. Gap coverage can be bought through lenders that finance the purchase of the vehicle or through insurance companies.

Gap protection, when bought from a source (lender) other than your insurance company, is a one-time charge, whereas if bought from your insurance company, it is billed as an addition to your regular premium.

In the latter instance, as it’s not a one-time charge, you pay for it every time you pay the premium, until you cancel it. Therefore, you should keep calculating the premium every now and then to avoid paying additional expenses. Not all insurance policies are the same. Some reimburse the insurance deductible while others offer vehicle replacement.

Here are some 3 key points you must keep in mind when buying gap insurance:

  1. Some car dealers charge more than others for gap protection. Therefore, you must do your own thorough research of all the sources before deciding on one.
  2. If you are buying the insurance online, use out free insurance quotes system and research the available GAP options and costs among multiple insurance companies.
  3. Make sure the insurance covers you for all types of losses such as theft, natural disasters and accidents.

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