GAP Insurance. What's the Scoop?

What is Gap Insurance and is it worth the cost?

Your new vehicle is your new pride and joy and it's typically a five-seven year investment till it's completely paid off. What happens if you're new car/truck/SUV is stolen or written off in an accident? If the settlement from the insurance company does not cover the money you owe the bank, you're in a position where you will have to pay the bank for a vehicle you're not even able to drive while you look to replace your vehicle. As one can imagine, this scenario can be very stressful and can cause serious economic harm to your household.

Guaranteed Asset Protection (GAP) is an insurance policy that pays the difference between what your vehicle is currently worth and how much you owe on your car. Comprehensive and collision vehicle insurance only pays a car's value at the time of a loss, but, as mentioned, you may owe more on your auto loan or lease than the car is worth and have to come up with the money to pay off the loan. This is when GAP insurance can come to your rescue.

Remember, while nearly 70% of car buyers finance or lease their purchase, the insurance company determines "replacement cost" based on cash purchase pricing. They are able to tap into cash discounts offered by the manufacturer to reduce the cost of the settlement.

What are the values and costs?

Countless vehicles lose more than half their value during the first four years of ownership. Many new cars depreciate at least 20% in their first year. So if your $32,000 "new" auto is only worth $25,600 at the time of the accident or theft, but you owe $29,600, you could have to pay the lender $4,000 (plus the amount of your auto insurance deductible). GAP insurance would cover that $4,000 (but not the deductible).

Who needs a policy?

Auto insurance claims only cover the actual cash value of the vehicle. Accordingly, a GAP policy makes sense if:

The down payment is small; you can be in a deficiency position on your loan the minute you leave the dealership.
The vehicle is a model that depreciates faster than others; if you add a lot of miles per year, it will depreciate even faster.
You have a long-term loan, such as a seven year loan; it will take a longer for your payments to catch up or keep pace with the vehicle's depreciation.
The lender or lessor requires the insurance as part of your deal.
You have a history of accidents, or your vehicle is more likely to be stolen (based on model or neighbourhood).

You do not need GAP insurance if you own the car outright, made a substantial down payment, or you're leased vehicle includes it as part of the lease agreement.

Making the right purchase and decision

GAP insurance isn't for everyone, but it benefits more people and helps cover more situations than many would expect. In the end, GAP insurance coverage helps you avoid getting stuck with a costly mess should you need it.

Check whether you need it when purchasing or leasing a car. A respected auto dealership, such as Kia Sudbury Motors, can both help you find the right vehicle and help you assess whether purchasing a policy to fill in coverage gaps makes sense. We can assist with the application and paperwork on site.

By John Nicholson