Cars get stolen; cars could crash. When getting a new car, one is always faced with these possibilities. And what better way to ease financial burdens during your lowliest times than getting your car insured.
When getting car insurance, another “upsell” may just be taken for granted by many. Most often than not, your insurance provider (or car dealer) would offer GAP insurance on top of the collision and comprehensive insurance; but what is GAP insurance?
GAP insurance is also called as Guaranteed Auto Protection.
In cases when your car is a total loss, GAP insurance plays a major role in your finances. In accidents or theft of a vehicle, your insurance provider would only cover the actual cost of your car at the time of the accident or theft. GAP insurance will pay for the amount of money that you owe the financing after your standard claim settlement is granted.
Read on for you to know more about this type of insurance as well the current GAP insurance rates.
Average Cost of GAP Insurance
The Insurance Information Institute, on their website, says an average would be about $20 or so added to the annual premium. Although this is not usually the case for lenders who will most likely offer GAP insurance to you at a higher price than usual. United Policyholders states that when getting it from a lender, GAP insurance would cost about $500 – $700.
What are Included
An example is if you got a car at $20,000 and a year or so later, your car gets totaled out, your insurance provider, after assessment, values your car at $15,000 at the time of the accident. By this time, you still owe the car dealership $17,000. After your insurance has paid the $15,000, who pays for the remaining $2,000? That is when GAP insurance enters the picture. Your GAP insurance pays for the remaining $2,000.
If you so decide to buy your GAP insurance from the dealership, the amount of the insurance is added to your loan, which means that any amount added would be incurring interest over time. And even if the interest rate is quite low, any addition could have been saved up and put into other uses.
Shopping for GAP Insurance
- There are a number of companies that sell GAP insurance. The most popular choices are Nationwide Insurance, American Family, AAA, State Farm, USAA, Safeco, Kemper, and Travelers. With all these choices, it would be wise to read through each insurance provider to know how much it is and what it covers. You can also get quotations just by visiting their websites. This is a good way for you to check and compare GAP insurance rates.
- Another useful tip is that you can also get your GAP insurance from the same insurance provider where you got your collision and comprehensive insurance. That way, in cases when your car is at a total loss and you need to file for claims, you only get to file it with one provider. This would save you the hassle of going from one provider for your collision insurance and to another for your GAP insurance.
- Popular choices like Travelers, Safeco, and Kemper all have GAP insurance rates of about 5% to 6% of the comprehensive and collision premium. And because collision and comprehensive insurance typically cost about $420 to $560, 5% to 6% would equate to about $21 to $33.60 per year.
Factors Affecting Cost of GAP Insurance
- Upon signing of the papers from your car dealership, you would usually be offered GAP insurance as an add-on to your current insurance. Dealers charge higher than the normal, with rates of about $500 to $700 for GAP. It will also be added to your total loan which, if you think about, will also be incurring interest rates over time.
- You are better off with your own insurance providers as their rates tends to be less expensive than that of the car dealers. At $20 to about $25 per year or about 5% of your premium, the average GAP insurance cost from your insurance companies would be way cheaper.
So when do you buy GAP insurance? Is it something that you really need or is your insurance company selling you something you do not need? See below to determine whether GAP insurance is a wise choice or not:
- The vehicle you have on loan has a zero to low downpayment (usually if payment was below 20%);
- You do not have huge savings to pay for the GAP between what the insurance company is paying and the amount you owe the car dealership;
- Your loan term is 60 months or longer; and
- The actual cost of your car is lower than the amount you owe the car dealership.
If you paid for the car in cash and do not have any loan from car dealerships, you do not have a need for GAP insurance.
In case you would like to know, you can keep the GAP insurance until such time when the actual cost of your car is already significantly lower than the amount you owe the car dealership. You may opt to cancel the GAP insurance if you are more confident that you can fully pay the lenders in cases of total loss, or you may also choose to continue. If you do not want the GAP insurance any longer, you can review your contract with your insurance provider and see the cancellation process.
There is also an alternative, called a loan/lease payoff. Unlike GAP insurance which would cover the difference in cost between the actual car value and the money you owe the lenders, loan/lease payoff typically covers up to 25% of the car’s actual value. For example, if your car’s actual value at the time of total loss is at $30,000, the loan/lease payoff covers $7,500. Progressive has it at $20 for the usual 6-month policy.