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Overpaying on car insurance?

A Complete Guide To AAA Gap Insurance

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Image via Unsplash by Meric Dagli

Aside from historical and collectible vehicles, all automobiles lose value over time. If your financed vehicle is totaled, AAA gap insurance can pay the remaining balance on your loan if you owe more than the vehicle is worth. In this article, we explain all you need to know about AAA gap insurance.

What Exactly Is AAA Gap Insurance?

The value of a new automobile begins to depreciate as soon as you drive it off the lot. If you total your new automobile during the first few years, you may owe the bank more than the car is worth. You would expect to have enough coverage, but this may not always be the case. Even if your coverage is extensive, you risk losing money if your new car is devalued.

What happens here is that the firm that has provided the coverage will also consider the depreciation value, which is the decrease of the vehicle’s value over time. Unfortunately, your payout for your vehicle’s current value may not fully cover what you still owe on your lease or loan. This is when AAA Guaranteed Asset Protection insurance comes into play.

Gap insurance is an optional endorsement that compensates for the difference, or “gap,” between the loan amount and the vehicle’s depreciated value or its actual cash value (ACV) if it is stolen, damaged, or totaled as a result of an enclosed claim. Gap insurance is often optional to the driver. However, sometimes a vehicle dealership is required to provide gap insurance at the time of purchase.

What Does AAA Gap Insurance Cover?

If an accident occurs during the period of coverage and the motor policy underwriter labels the vehicle as a total loss, the AAA gap insurance will pay the difference between the insured value or the value of the vehicle as determined in the coverage policy and the market value of the vehicle. The AAA gap insurance will also cover total losses due to vandalism or theft, a crash or collision, and a natural disaster such as flood, tornado, fire, and hurricane.

Keep in mind that gap insurance usually is only applicable to automobiles that are new or less than a year old and have been totaled or stolen. It does not cover repairs, damages, accidents, or a sale or trade-in, even if the loan amount is greater than the vehicle’s worth. It will also not help you in purchasing another vehicle. You would need new car replacement coverage to pay the costs of a new vehicle. Some other common exclusions may include:

  • Delayed auto lease items that were added to the vehicle after it left the manufacturer
  • The cost of comprehensive warranties
  • Any costs deducted by your insurer for existing damage, towing, and wear and tear

When you file a complete loss claim, your insurance will pay a maximum of the vehicle’s actual cash value (ACV). In some situations, the amount you still owe in auto payments may surpass the ACV of your vehicle. This is referred to as having negative equity or being underwater on your loan. Gap insurance assists you in repaying the debt in this case. Remember that just because your automobile is totaled does not mean that your loan is canceled.

How Does Gap Insurance Work?

Assume you finance a nice new automobile for $30,000 and total it a year later. Your auto insurance covers the depreciated worth of the car, but you still owe $25,000 on loan. That leaves a $3,000 difference between what your vehicle insurance covers and what you repay your lender. Gap insurance will cover the $3,000 difference, saving you from having to write a large check.

Why Should You Choose AAA Gap Insurance?

AAA provides cheap gap coverage that you can rely on. AAA comprises multiple autonomous clubs and organizations that have vowed to provide various types of services to the community. AAA gap insurance coverage helps you with your automobile issues as soon as possible without negatively impacting your credit report. AAA’s unique traits include:

  • Affordably priced insurance coverage
  • Provision of towing services is at no cost in the case of an accident
  • Free trip maps, motel recommendations, and guidebooks
  • Discount provision on AAA-approved hotel prices
  • Discounted travel plans

Do You Need AAA Gap Insurance?

You do not need to get gap coverage if your car is not financed, or if you have paid down a significant portion of your loan. If you finance your automobile, gap insurance may be a smart option, depending on how rapidly your car depreciates and how much you drive. According to the Insurance Information Institute, many automobiles lose 20% or more of their value in the first year of buying, showing how quickly a car’s value depreciates. If you don’t put down a substantial deposit, the amount you owe might rapidly exceed the value of the automobile.

It’s a good idea to think about getting AAA gap insurance for your new automobile or truck if you:

  • Put down less than a 20% deposit
  • Financed for a period of at least 60 months
  • Leased the automobile (carrying gap insurance is generally required for a lease)
  • Purchased a car with a higher depreciation rate than the average
  • Rolled over negative equity from an old car loan into the new loan

Keep in mind that your “gap cost” is continually changing. In general, when you make monthly payments and the automobile depreciates, the difference between what you owe and what it’s worth reduces. You may terminate the coverage at any time, but it is usually suggested that you do so only when the amount due on the car is less than its market worth. Consider the cost of risk if you are unclear if gap insurance is worthwhile. Other scenarios in which gap insurance may not be necessary include:

  • When there was a substantial down payment
  • If the initial loan duration was short, for example, three years or less

Adding gap insurance to current coverage might provide some drivers with additional peace of mind. However, coverage requirements and benefits will differ greatly depending on the driver.

FIXD Research Team

At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.

We’re here to help you simplify car care and save, so this post may contain affiliate links to help you do just that. If you click on a link and take action, we may earn a commission. However, the analysis and opinions expressed are our own.

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About the Author

FIXD Research Team

FIXD Research Team

At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.

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