How Does Gap Insurance Work?

Topics: Small Business

Summary: New car owners should consider gap insurance to help cover accidents within two years of ownership. This article explains what gap insurance is, what it covers, how much it costs and more.

How Does Gap Insurance Work?

Did you know that your new vehicle starts to depreciate as soon as you leave the car dealer’s lot? According to the Insurance Information Institute, your car's value can go down 20% to 30% in the first year and continues to decline over the time of your ownership. If you were involved in an accident that totaled the car a week after you purchased the care, you would be responsible for paying the difference between the car’s actual cash value and the amount of your car loan. To assist in the payment of the difference to new car owners or leaseholders, auto dealerships and insurance companies offer gap insurance or loan/lease gap coverage. Gap is short for “guaranteed asset (or auto) protection.”

What is Gap Insurance?

Gap insurance ensures that vehicle owners won’t incur a loss if the vehicle is damaged beyond repair or stolen and never recovered by paying the difference between the insurance settlement amount and the loan or lease balance. The car's actual cash value is the cost of the vehicle when it was new, minus depreciation for age, mileage, physical condition and other factors.

How Gap Insurance Works?

The traditional auto insurance policy covers a car's current market value at the time of a claim. In an accident, gap insurance pays for the difference between what the vehicle is currently worth and the actual amount you owe on it. For example, you bought or leased a car for $28,000, and a year later, you were in an accident where the vehicle was a total loss. The actual car value is now only $22,000, but you still owe $25,000 on the loan. Your standard collision coverage will pay the $22,000 directly to the auto lender. The gap insurance will cover the $3,000 difference.

What Does Gap Insurance Cover?

Gap insurance policies are adaptable to your needs, but it is important to remember that it only covers damage to a vehicle and not property or injuries resulting from the accident. Some common occurrences that gap insurance covers include:
  • Theft: Gap insurance will cover the costs to replace your car if it is stolen and unrecovered.
  • Negative equity: This is another term for the gap between the car’s actual value and what the car owner still owes on the loan.
  • Accident car damage: If a car is totaled in an accident, gap insurance kicks in for the difference of the collision insurance current value of the vehicle.

Gap Insurance doesn’t cover the following situations:
  • Deductible costs
  • Car mechanical repairs
  • Lost wages
  • Medical costs
  • Injuries or death

Do I Need Gap Insurance?

Is gap insurance worth it for new car owners? It is additional coverage to comprehensive and collision auto coverage. There are some car owners without negative equity in their car, who might not need the coverage. Nerd Wallet recommends gap insurance for car owners who:
  • Put only a small down payment or no money down at the time of purchase
  • Have a loan longer than 48 to 60 months
  • Lease their car
  • Drive more frequently, which depreciates car value more quickly
  • Purchase a vehicle with a history of higher depreciation values

Where Can You Buy Gap Insurance?

Gap insurance is offered to new car owners and leaseholders at the time of or near the purchase date. The coverage is available for purchase from three sources:
  • Car dealership where the cost is added into the car loan
  • An insurance provider as part of your auto insurance policy
  • An online company that sells gap insurance as a monoline coverage for a one-time fee

How Much does Gap Insurance Cost?

The cost of gap insurance varies depending on where and how it is purchased. If you buy gap insurance at the time of purchasing a new car at a dealership, a flat fee will be added to the total payment, and you will pay interest on the additional coverage over the time of the loan. Gap insurance purchased through an insurance provider as part of an automobile coverage depends on the car’s value and will be part of the policy's yearly cost. When buying a gap insurance policy as a standalone through an online insurer, there is usually just a one-time fee.

When Can You Buy Gap Insurance

Insurance guidelines could vary, but most gap insurance coverage should be purchased within two to three years of buying a new car by the vehicle's original owner. Once a car in no longer new, gap coverage usually expires, and the consumer will need to contact their insurance company or loan provider to remove it.

Partner with AmTrust Specialty Risk as Gap Insurance Provider

From underwriting to reinsurance, AmTrust Specialty Risk can help your business meet the coverage needs of your partners and their customers. We can offer flexibility, industry-leading support, industry insight, innovation, strength and staying power, and unmatched protection. Contact us to find out more about our automobile extended warranties and other specialty warranties.

This material is for informational purposes only and is not legal or business advice. Neither AmTrust Financial Services, Inc. nor any of its subsidiaries or affiliates represents or warrants that the information contained herein is appropriate or suitable for any specific business or legal purpose. Readers seeking resolution of specific questions should consult their business and/or legal advisors. Coverages may vary by location. Contact your local RSM for more information.

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