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Another Explanation of Gap Insurance



You have been looking at new cars for a few weeks now and have finally decided on the one that you really like. You have read the consumer reports and looked at the data and made a decision based on all the facts you could find, including what you should pay for your new car.

You have driven the model you like and have decided this is going to be your next new car. You have found the car dealer you like and after some negotiations the price has been agreed upon.

After all the paperwork has been put together, the financing is in order; you have gone online to our home page and purchased your auto policy and now you are ready to drive away in your brand new car.

It has now been about three weeks since you bought your new automobile, you are in a rush on your way to work this morning and, "Oh no", you had a crash with another commuter going to work. "Aagh", your brand new car! Ouch!

Fortunately, no one was hurt, but it turns out that the accident happened to the new car in just the right spot, and the car is going to have to be "totaled" because it cannot be repaired properly. You will have to find and buy another new car to replace it. What a bummer!

But again, fortunately, you have a good full coverage insurance policy so this should be no problem, right?

Ok, the insurance company adjuster just went to the salvage yard to see the car, and he is now looking on his laptop to find the "actual cash value" of this car. How much did you pay for this car, and finance with the bank? Well, you still have the car dealer's invoice, so you go into your home office, pull out the new car sale paperwork and go back to talk to your adjuster.

How much was that new car? You traded in your old clunker and financed $30,000 with the bank so you could drive it off the lot.

Depreciation, your adjuster says, brings the actual cash value for the car down to $24,000. Wow, in three weeks the difference between what you financed the car for and what the "ACV" is $6,000. Since the car is financed, the insurance adjuster, being the good insurance company they are, reaches into his briefcase and pulls out a draft; writing a draft to your bank and you as payees for the full actual cash value (ACV) of $24,000.

So, you take the draft to your friendly bank that financed your new car for you; hand them the check and they dutifully apply the check to your loan of $30,000. Oh, and since it has only been three weeks you were just getting ready to make that first car payment.

Now your new / old car is in the salvage yard with a salvage title, so the bank, (or you) can't do anything with it but say goodbye. But, the bank, being the good bank they are, hands you now your final payment invoice of $6,000 + accrued interest on the $30,000 since the time of purchase. Gulp! You reach deep in your pocket and find that you don't have that $6,000. Ouch again!

Again, being the good bank they are, they will set you up with a payment plan so you can pay them off the outstanding $6,000 with a "reasonable" monthly payment, and help you to keep your good credit rating.

As you can see, this is not a good situation. All insurance policies that are covering the physical damage for any vehicle only pay for the "Actual Cash Value" which is always the depreciated value of the vehicle.

So, a new car is especially vulnerable due to the fact that the amount financed is usually much larger than the ACV. This is where Guaranteed Auto Protection (GAP) insurance comes to the rescue. GAP insurance covers the difference between what your car is financed for, and what the actual cash value of the vehicle is in case of an accident. From the example we just gave you can see the gap premium is well worth the coverage GAP insurance will give you.

Remember our friendly adjuster in the example above? With GAP insurance he calls your bank to get your payoff amount on your loan. He finds that, in our scenario, that you owe $30,000 plus accrued interest, and he simply writes out a check to the bank to pay off your loan. It might actually be the insurance company home office doing the check writing, but either way you are far ahead of the game. Or if you get your gap insurance through a second insurance company you may need to have the first insurer pay out the actual cash value to your lien holder and then the gap insurer follow up with a check for the balance (gap) amount still due on the loan or lease.

When you buy that new car, or even a nice used one, that you are paying on be sure to ask your insurance agent about GAP insurance and include that coverage on your policy. You can't always depend on your car dealer's finance department to tell you about GAP coverage since they want to get you in the car and out the door, so you must take the initiative to get the coverages you want with your insurance agent.

While GAP insurance is very helpful to those that are what is termed upside-down on a loan, owe more than the car is worth there are exclusions to gap policies and one should take that into consideration and read over them carefully when obtaining their gap policy.

  • Typical exclusions / policy rules that a GAP insurance policy will list include:
  • A maximum limit of loss of $50,000
  • A GAP claim settlement may not cover the entire gap due, when your loan's Original Amount Financed exceeds 120% of MSRP (new vehicle) or NADA Retail Value (used vehicles), plus 30% of Value allowable for Additional Financed Items like Credit Life or Service Contracts.
  • The claim settlement does not cover late charges or other penalties due to your lender.
  • Your loan amount financed must be less than or equal to $100,000.
  • Your loan term must not be greater than 84 months.
  • The loan must not have a balloon payment due at the end of the term.
  • The maximum APR allowed may differ but usually tops out at 12.5%.

Gap insurance is for the gap one has when they owe more than their car is worth, the ACV, at the time when the car was determined to be a total loss. It is there to help you pay off the car after a total loss so that after the primary insurance has paid you are not stuck with a balance on the loan and thus paying on a car you no longer are able to drive. If the actual cash value is not paid then gap insurance will usually not pay either. Gap insurance is not there to pay off the whole loan amount for you, just the "gap" between the ACV and the balance of the loan.

Some people mistakenly believe that GAP insurance will help them with other situations, such as making their car payments or paying off their car if they lose their job or are out of work for a long period of time. Gap insurance is not for these types of circumstances. It also is not proof of insurance that you could show to get out of a ticket for not having primary insurance on your vehicle.

In case you have an accident, and people do all the time, gap insurance can save you a huge headache and get you back on the road with another new car quickly and with considerably less expense by helping to pay off the remainder of your financed amount after an insurer pays for the car's ACV. Don't skip over GAP (sometimes called Loan/Lease GAP Insurance) insurance when buying insurance on your new car or you may end up paying off a car that was totaled out and not fully paid for by insurance while trying to buy a new car that you can actually use for transportation to get you to important places, like your job.


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