GAP INSURANCE – DESIGNED TO BRIDGE THE GAP
“The more expensive your vehicle and the less equity you have in it, the more you can benefit from Guaranteed Asset Protection insurance,” writes Jackie Lohrey in finance.zacks.com.
Indiana state law dictates that all drivers carry a minimum amount of insurance, designed to cover the expenses of medical services and treatment for those injured in an accident, including:
- $25,000 liability insurance per person
- $50,000 liability insurance per incident
- $10,000 property damage
Reality is, despite those laws, many drivers do not have any insurance at all. But, in order to protect yourself, you should know about other types of benefits available to cover bills in the event of an accident:
- Comprehensive – This helps pay for damage to your vehicle caused in incidents other than car accidents, such as vandalism, theft, and fire damage
- Collision – This covers the cost of damage from a collision with another car or an object
- Rental reimbursement – This helps pay for alternative transportation while your car is being repaired
- Medical payments – This covers accident-related medical or funeral costs of covered drivers and of passengers (fault is not taken into consideration)
- Emergency roadside service – This helps provide for towing and labor service (assistance with changing a tire, jumpstarts, towing, locksmith, delivery of gas or oil)
- Customized parts and equipment – This is an endorsement to the policy that pays for equipment, devices, and accessories other than those installed by the original manufacturer
One especially important type of insurance is Uninsured and Underinsured Motorist Coverage. UM/UIM protects you in the event that the driver who was responsible for your accident has no coverage, or not enough of it.
Yet another type of coverage to consider – GAP.
What is GAP insurance? GAP is an optional insurance coverage that can be added to a collision insurance policy. If your car is covered by insurance, but is considered a total loss after an accident, GAP insurance is designed to pay the difference between the balance on your lease or loan and what your insurance company pays. If your car is stolen and you owe more than the vehicle is worth, GAP insurance would provide the difference between what’s owed on the car and its estimated value.
“Car GAP insurance is one of those expenses that seem like a waste of money until you need it,” observes bankrate.com. Russ Heaps of bankrate shares an open secret: the moment you drive a vehicle off the dealer’s lot, your auto insurance is probably inadequate to protect you financially in the case of a total loss.
Think that’s an exaggeration? According to Edmunds.com data, in 2015, 30% of car sales that had a trade-in were ones in which the owner still owned money on the vehicle. The average amount of negative equity was $4500!
Who should buy a GAP policy? Bankrate.com quotes Bill Pearse of Travelers Insurance, who says you’re a likely candidate for GAP if:
- You’re leasing a vehicle
- You’re financing a car for 60 months or more
- You’re putting less than 20% down
- You’re rolling “negative equity” from your previous vehicle into your new vehicle loan
- You drive more than 15,000 miles a year
- You’re purchasing a vehicle with a history of high depreciation rates
GAP insurance steps in when there is negative equity, meaning you owe more on an asset (in this case, a car) than it’s worth. You’re “upside down.” You’re “under water.” Philip Reed, Senior Consumer Advice Editor for edmunds.com offers one simple example of negative equity:
- You have $15,000 worth of car payments left, but the value of the car has depreciated to $10,000
Where do you buy GAP insurance?
- From the dealer (at the time of purchase or lease)
- From an insurance company (at any time)
GAP insurance can become very important when you have complications with your Indiana personal injury claim after an accident:
- The at-fault driver does not have insurance. Your damages would be paid by your insurance provider under the uninsured motorist coverage portion of your coverage.
- The at-fault driver had insurance, but only the minimum $25,000 liability coverage required in Indiana. That driver’s coverage would pay the first $25,000, and your underinsured motorist coverage would pay the remainder up to the limits of your coverage (which may not be enough to cover the loan or lease on your car).
After an automobile accident, a lot of money can be involved, not only in terms of personal injury, but also in terms of car repair and replacement. For this reason, drivers need to be prepared for possible disputes with their insurance company. Some steps to take include:
- Saving all paperwork related to the accident
- Getting an estimate from a trusted repair shop (in the event the insurance company undervalues the repairs the car needs)
There are several important considerations when it comes to Guaranteed Asset Protection (GAP) insurance:
- Because the intent of GAP is to work with traditional liability coverage, it will not pay if your primary insurance company denies your claim.
- Unlike other forms of auto insurance, with GAP there is a one-time only premium (you may choose to pay it upfront or incorporate it into a loan if you purchase it at a dealership).
- Once you make a claim, the GAP policy expires.
- GAP insurance requires a “triggering event” before it kicks in. But, because GAP focuses on your loan instead of on the car, the triggering event is not the accident or theft or damage, but the declaration by your insurer that the car is a total loss.
While consumers may at first have a problem understanding the unique limitations of GAP coverage, those limitations really make sense. GAP is a form of credit insurance and it covers your loan, NOT the vehicle itself.
In fact, GAP insurance is designed to do just what its name implies – bridge the gap between what your insurance company will pay and what you owe.