We are finding that more and more of our customers are being required to buy GAP insurance when financing their car. If you buy this coverage through the finance company you are generally being charged as much as $700!!! We can provide GAP insurance as an endorsement to your existing auto policy for as little as $30!!!
When purchasing a car always call and let us know so we can be prepared to process the paperwork for the auto dealership. At that time we can go over your existing coverage to be sure you have what you need for the new car.
What is GAP insurance?
Gap insurance, also known as loan-lease payoff coverage, can provide valuable protection during the early years of your car’s life if you have a loan or a lease.
If a loss occurs, gap car insurance will pay the difference between the actual cash value (ACV) of the vehicle and the current outstanding balance on your loan or lease. Sometimes it will also pay your regular insurance deductible.
If your vehicle has been totaled by a covered peril, such as an accident, theft, fire, flood, tornado, vandalism, or hurricane, your insurance company will pay you the actual cash value for your car, if you have comprehensive and collision insurance. This amount is often considerably less than the actual amount you still owe on your loan or the amount due for a lease payoff.
When the amount of your ACV payout is less than what you owe on your lease or loan, the loss from this financial shortfall is the “gap” you can be left owing.
This is how a “gap” occurs (using fictitious numbers):
- You choose a car that costs $25,000 and you drive it off the lot.
- After paying the down payment you owe $24,000 in car payments over five years (0% interest loan = $400 car payments).
- You purchase physical damage insurance (comprehensive and collision) with a $500 deductible to protect you against damages and loss.
- You have an accident while you are still upside down on your loan or lease (meaning you owe more on a car than it’s worth) and your vehicle is totaled out.
- The insurance company determines that the actual cash value of the car is only $22,000, but at the time of the loss you still owe $23,500.
- Gap insurance should pay the difference plus your deductible, totaling $2,000. (Note: not all gap policies pay the deductible).
Here are the line items:
- Loan payoff at the time of accident: $23,500
- Vehicle’s actual value at the time of accident: $22,000
- Your deductible: $500
- Physical damage insurance pays: $21,500 ($22,000 minus $500 deductible)
- Gap insurance pays the difference between what is owed and what the physical damage insurance company pays (plus your deductible): $2,000
Many car owners don’t take into account the depreciation that takes place with a new car. Within minutes of driving off the lot, a new car can be worth 10 percent less than what you just paid. In our example above, if you owned the car for three days, had physical damage coverage and the car was totaled, you could owe 10 to 20 percent of the $24,000 ($2,400 to $4,800 out of your pocket) even though you purchased “full coverage.”
Car owners often assume that if their car is totaled, it will be replaced at the amount they paid, or at least the amount they owe. This is not so. That is why many car insurance companies offer gap insurance (loan/lease payoff insurance) as an optional coverage that is available with physical damage coverage. Typically, a stand-alone gap policy is sold by a car dealer at a higher cost.