What is GAP Insurance & Do You Need It?

GAP (guaranteed auto protection) insurance came along in the early 1980s as a way to help customers if their cars are lost or stolen while they’re still making payments on it. GAP coverage is useful if there’s a gap between the actual value of your vehicle and the amount of money you owe to the lender, so it basically covers the difference between what your car is worth and what you owe on the car.

So, do you actually need it? That depends on how long you plan to keep your car and what your loan terms are. If you expect to be “upside down” (when the amount owed on your car loan is more than the actual value of the vehicle) or you’re leasing, then GAP insurance is a good idea.

To give you a visual example of how GAP coverage works, look at this example using made-up numbers from carinsurance.com:

• 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 5 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 (“Upside down” means owing more on a car than it’s worth) and your vehicle is totaled.
• 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 $2000. (Not all GAP policies pay the deductible)

You don’t have to get GAP coverage, and it’s a lot like any other type of insurance where you get it and hope to never use it. But, some insurance companies will include GAP coverage with some coverage plans, so if you want it see if you might already have it with your insurance provider.

If you have any questions on auto insurance or have a comment about this post, feel free to contact me.