GAP insurance: A fresh perspective

by Juano11 » Thu Nov 13, 2008 12:21 am

Gap insurance ensures protection for your vehicle, just like any other auto insurance policy. As a matter of fact, 'GAP' is a widely used acronym for Guaranteed Auto Protection. Read along to know how gap insurance policy serves its purpose.

Topics covered

What is Gap Insurance?
How does it work?
When do you need it?
Is it mandatory?
Who offers Gap Insurance?
How much does it cost?
Are you entitled to refunds from the policy?
What should you consider while buying it?

What is Gap Insurance?

Gap Insurance lends a helping hand to those vehicle owners who have taken out a loan or lease to buy their cars. This form of insurance policy lends financial assistance when the insured vehicle is totaled. It pays for the difference between the actual cash value (ACV) that the conventional auto insurance pays and the due amount for the unpaid loan or lease.
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How does it work?

It is truly said that your vehicle starts depreciating the moment you buy and take it out for your first ride. The value of automobiles usually depreciates with time. It is estimated that a car loses almost 30% of its value in the first year only. Therein, your gap insurance policy comes into action.
The following scenario might be able to show you how gap insurance can be of assistance:

Sally and Molly are two friends. They buy or lease their cars at the same time. They also purchase auto insurance protection for themselves. Now...

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When do you need it?

You'll need gap insurance in the following circumstances:

When you take out a lease - If you have leased the vehicle, the gap insurance will pay the unpaid amount to the vehicle owner.
When the repayment period is long - If the repayment period for your auto loan is 60 months or more, the value of the car will depreciate significantly within such a long period. The gap insurance will pay for the depreciation costs that your auto insurer won't pay.
When the down-payment is less - If the down-payment on your auto loan is 20% or even less, the due amount on your loan will be more. Gap insurance will pay for the surplus balance after your auto insurer pays the ACV of the vehicle.
When there is negative equity - If you have transferred negative equity from your existing auto loan into a new one, gap insurance will pay for the lost value of the vehicle to the financer.
When you buy a used car - If you have purchased a used car with a loan, it is expected to depreciate more rapidly. Thereby, this form of insurance policy will cover the gap between the ACV and the due amount on the loan.
When there is a history of value reduction - If you have purchased a vehicle with a history of depreciation in the market, the price for such a vehicle is expected to fall down even more with the passage of time. Thus gap insurance will be a great help, in case the car gets totaled or stolen.
When mileage is more - You'll need gap insurance if you drive more than 15,000 miles per year. The value of your car is negatively proportional to its usage. This means that the more you use your car, the lower its ACV is going to be. Thus, having gap insurance will be an advantage for you.

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Is it mandatory?

No, Gap insurance is an optional purchase. It's picked as an additional protection for the vehicle, along with the regular auto insurance coverage. However, financing companies might put it up as a condition for the new car buyers. Top

Who offers gap insurance?

It is offered by:

Auto insurers - The conventional auto insurance companies also provide gap insurance protection for the cars. Major insurance companies like State farm, Progressive or Geico offer gap insurance coverage, often under a different name like Loan/Lease payoff insurance or a total loss payoff program.
Automobile dealers - The dealers from whom you purchase the car, sometimes also arrange for the car financing. They may also ask you to buy a gap insurance policy.
Finance companies - They also offer gap insurance protection to the buyers at the time of the purchase.

If you take out a lease for the car, gap insurance coverage will most probably be incorporated in the contract itself.
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How much does it cost?

The cost for gap insurance coverage is estimated to be around 5%-6% of the physical damage coverage cost, i.e. around 5%-6% of the amount you pay for the collision and comprehensive coverage. However, certain factors also affect the cost such as -

Value of the car at the time of purchase.
The auto loan amount.
The policy terms as offered by the different insurers.

Sometimes, the costs are financed into the auto loan amount only. Just like any other insurance, you can compare insurance quotes to get an affordable gap insurance policy. Top

Are you entitled to refunds from the policy?

You can get a gap insurance refund from the unused premiums, if your car is paid or sold off earlier than the specified time period. It depends upon your insurer as well as on the policy terms that whether you'll be able to get a full or partial refund or any at all.
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What should you consider while buying it?

The below mentioned points should be taken into account, when you think of purchasing a gap insurance coverage:

Verify whether it's already included - Often the car dealers or leasing companies include the gap insurance in their contracts. Thus, it is recommended that you review your policy documents before signing them.
Determine if you have negative equity - Gap insurance only comes into action if your vehicle has negative equity, i.e. the market value of your car is lower than the unpaid lease or loan amount. Find out how much equity you have in your car and whether it may reduce in the future.
Check the policy limitations - Some gap insurance policies come along with limitations like a maximum loss limit of $50,000, or with a specified loan term period. It is advisable to know about the policy limits before you buy your gap insurance policy, since some insurers pay only a specific dollar amount or a percentage of the loan balance
Get the other necessary coverage - Most insurers make comprehensive and collision coverage necessary, for those who buy gap insurance. Therefore, you need to ensure that you have the necessary coverage when you buy your gap insurance policy.

Gap insurance sometimes even pays for the deductible, when you file a claim against your auto insurance. However, the facilities that accompany gap insurance coverage might vary from insurer to insurer. It is advisable to sign up with a gap insurance policy, only when you fully understand what will be offered to you at the time your car gets totaled.Top

Total Comments: 19

Posted: Thu Nov 13, 2008 03:53 am Post Subject: Some Thoughts

Congrats on the new car, Juano! I'm sure it will be a great ride for 72K. Enjoy!

I like the idea of Gap Insurance, especially for that amount of money. I used to be a gap insurance state farm Agent. Although I don't have the particulars of that coverage in front of me, we offered it through State Farm Bank. Two yrs ago, you would get approved via SF Bank, start the loan and Gap Insurance was included with the loan at no charge. Again, this was not offered through State Farm Insurance, but State Farm Bank.

Check with your finance company, first, then your bank, or credit union. It's a common request and they should be familiar with the product. I would shy away from other sources until you exhaust traditional outlets for Gap Insurance.

Posted: Thu Nov 13, 2008 06:32 am Post Subject:

Gap insurance is just the right thing to have at this juncture to ensure the peace of mind. $72k is pretty big an amount to finance a car. Car Guy is right, its surely gonna be a great ride :D. its also important that you maintain sufficient collision and comprehensive coverage on it for the period of the loan.

You can also purchase the gap insurance separately from another insurer if its not available with the current insurance company. Some financing companies may have the gap insurance built within the loan amount. Hence, it would be wise to check that possibility.

Hope it helps.

~Jeremy

Posted: Thu Nov 13, 2008 06:42 am Post Subject:

Gap insurance isn't very expensive but a great coverage especially when you are upside down on a car loan. You can obtain the gap policy at reasonable rate from an insurer. Dealers offer gap insurance as well but often at higher rates.

The gap insurance can be maintained with another insurer, who isn't insuring the car. I hope that your agent will be able to help you in this issue.

Posted: Thu Nov 13, 2008 11:09 am Post Subject:

$72,000 financed at 3.9% interest for 5 years results in a monthly payment of $1,323 for 60 months for a total of $79,380 paid out.

Automobiles are interesting.

They are the only goods sold whereby the purchaser knows going into the deal it's a losing proposition yet they do it freely, willingly and with such enthusiasm.

I wonder how many people would go to their financial advisor and buy a product,... stock, bond, mutual fund, annuity, money market, bank CD, etc...and the deal is... invest $79,380 dollars over the next 5 years for an item that will be worth about $40,000 at best in five years?

And then in some bIzArRe twist of financial logic be concerned about GAP insurance so they don't get into DEEP financial doo-doo if the fine ride becomes scrap metal. :shock:

Sorry, no way, no how, would I pay that kind of money for a car.....

....UNLESS the mechanic comes with it! :wink: :P

Posted: Thu Nov 13, 2008 11:43 am Post Subject:

Gary, HA!, I know, I know...you're right. :) A new car is never a sound investment. It's a toy. An expensive toy, but one that I've wanted for a long time and that I've worked hard to be able to afford.

I could put more down on the car, but we've also got a small home equity loan, at a higher rate, that I'd prefer to put the money toward.

I'm looking for the Gap insurance to keep what I acknowledge is a bad financial decision from suddenly turning into a terrible one.

Car Insurance Guy, gap insurance state farm bank is offered if you finance through them, but their interest rate is a couple of points higher than the loan that I can get through the dealership.

Can anyone point me toward a specific insurer for gap insurance? If there are rules against this on the forum, then I apologize.

I know that I want to purchase gap insurance on this loan. I know that car dealerships typically sell 3rd party products at a markup. I'd like to "skip the middle man" and save myself a few hundred bucks by purchasing it myself, but I'd like to buy it from a reliable insurer, I just don't know who that reliable insurer is.

Many thanks

John

Posted: Thu Nov 13, 2008 12:01 pm Post Subject:

I know that progressive sells it, but don't know if you have to have their auto policy to get it...ask your lein holder to give you the names of several carriers .... wow 72k for a car...that's more than my first two houses cost combined! What is the car?

Posted: Thu Nov 13, 2008 12:13 pm Post Subject:

It's an 09 BMW M3, and believe it or not, I'm actually getting a good price on it...ha! The 72K is after tax, title, etc...

I was hesitant to post the price, but I thought that it might be helpful to know how much I'm financing to determine how much gap insurance would cost.

Thanks for the tip on Progressive, I'll see what I can find.

Does anyone else have any suggestions?

Posted: Thu Nov 13, 2008 12:24 pm Post Subject:

As I said, I'd ask the finance company for names of carriers offering this coverage, so you can contact them directly, another tip is to check your states Dept of Ins website, they generally list company's that are in good standing in your state, and what coverages/policys they sell...

ps Good for you! wow first car and it's a NEW beamer! livin' large my friend, livin' large! :wink:

Posted: Thu Nov 13, 2008 01:27 pm Post Subject:

:P Does the "mechanic" come with it? :lol: :wink:

Posted: Fri Nov 14, 2008 01:29 am Post Subject:

Geeze, I'd need one Gary, to figure out how to start the darn thing :roll: