You’ve got life insurance, health insurance, and car insurance, so you may think you’re well protected. However, it turns out that there’s another type of insurance that many people forget about that can save you thousands of dollars if things don’t go to plan with your new vehicle. Here’s what you need to know about GAP insurance and why it’s a good option for you.
What is GAP insurance?
GAP stands for Guaranteed Asset Protection. It’s no secret that cars are depreciating assets. In fact, it’s said that a new car loses 11 percent of its value as soon as it leaves the lot and nearly 20 percent during the first year. If you’re in an accident that totals your car, your insurance will only pay its current market value, often less than what you owe on the vehicle.
GAP insurance makes up the difference. If you have financed your car and owe more than the insurance payout after the car is totaled, GAP insurance will cover the leftover amount on the loan, which could be thousands of dollars.
Who needs GAP insurance?
If you’re financing a car, it’s probably a good idea to get GAP insurance and may even be required by your lender, according to the Insurance Information Institute (III). It’s especially a good idea if you’ve put less than 20 percent down on the new purchase or rolled the balance from a previous car loan into the new loan, since those things will increase the difference between what you owe and your vehicle’s actual market value.
Should you get GAP insurance for used cars?
Most people know that new cars depreciate rapidly, but few realize that steep depreciation continues for five years, during which vehicles lose between 15 and 25 percent of their value annually.
If you’re buying a used car that is less than five years old, gap insurance is a good investment, according to Joel Ohman, certified financial planner and the founder of carinsurancecomparison.com.
“The higher the dollar value and newer the car, that’s when you want GAP insurance,” he says. “If the car is pretty close to new and in really good shape, buying GAP insurance is a good rule of thumb.”
What does GAP insurance cost?
According to the III, adding GAP insurance to a plan that already includes collision and comprehensive coverage can vary widely, though is generally fairly inexpensive. GAP insurance may be available depending on who you buy from, but it’s a good idea to compare the cost of the dealer’s plan with plans offered through insurance companies.
“Policies can be pretty pricey and rates vary quite a bit,” Ohman says. You don’t have to purchase GAP insurance at the point of purchase, so take a few days to call independent insurance agents to get the best rate possible.