Do you have questions about whether or not GAP Insurance is for you? Perhaps you want to know if your situation, like an engine failure or stolen car, would be covered by GAP Insurance. Keep reading for an accessible guide to GAP Insurance!
By the end of this article, you will know what GAP insurance covers and whether or not you need GAP insurance for your vehicle. Plus, find answers to frequently asked GAP Insurance questions!
Why Would My GAP Claim Be Denied?
We’ll look into reasons why a GAP Claim would be denied. The most prominent reasons include falling behind on paying premiums and filing a claim for an uncovered loss.
Insurance companies deny claims when policyholders have not paid premiums or properly renewed coverage. Stay on top of premium payments and renewals to prevent this from happening.
To understand what situations are covered and which aren’t, we will explain what GAP Insurance covers and doesn’t.
What GAP Insurance Does and Doesn’t Cover
GAP Insurance is designed to cover the difference between the actual cash value of your vehicle and the remaining loan balance on the vehicle. A qualifying total loss could come from theft, disaster, or collision.
Pro Tip: If a total loss happens, you don’t want to be responsible for the remaining loan balance!
| GAP Coverage Calculation |
|---|
|
Car Loan Balance – Value of the Car = Remaining Loan Responsibility (The GAP) |
Be aware that GAP Coverage does not cover missing or late payments. If you are behind on your car payments at the time of total loss, you will still be responsible for the missed payments.
GAP coverage also doesn’t apply to mechanical issues or vehicle failure. That means that if the engine abruptly fails and the vehicle is totaled, GAP Insurance isn’t going to cover anything.
Pro Tip: GAP Insurance is supplemental to collision & comprehensive coverage. You need to file a claim with auto insurance to access GAP coverage. The vehicle also must be a total loss.
Many GAP Insurance carriers also do not pay the deductible on the collision and comprehensive coverage. The vehicle owner will still be responsible for paying the deductible.
It’s also important to remember that GAP Insurance IS NOT…
- Liability Insurance, so third-party collision expenses aren’t covered.
- Medical Insurance, so no personal or passenger medical expenses are covered.
- A warranty, so manufacturer defects are not covered.
- Payment protections, so it doesn’t cover missed car payments.
How Long Does It Take for GAP Insurance to Pay Off the Loan?
GAP Coverage takes between 5 and 45 days to cover the remaining loan balance. The speed will depend on where you live and other processing time factors. Some states require insurance companies to pay within a certain time frame, while other states don’t.
You can minimize the time until payment by checking your policy and following all of the guidelines in your policy for filing a claim.
Not Everyone Needs GAP Insurance
Gap Coverage isn’t necessary for every situation, but it’s a good idea in others.
GAP insurance is useful because cars can depreciate quickly. If the amount you owe on your loan is more than the car’s value, without GAP insurance, you would have to pay the remaining balance of the loan out of pocket in the case of a total loss. But if this “GAP” between the loan balance and the car’s value doesn’t exist, you probably don’t need GAP insurance.
For example, a customer purchases a new vehicle for $50,000 using an auto loan with zero down. Once the customer drives off the lot, the car is no longer considered brand new but pre-owned. It is pretty likely that there is a GAP between the value of the car and the balance of the loan in this situation.
Pre-owned cars have a lower value than new cars. We’ll say the vehicle is now worth $46,000.
That night, if the car is stolen. The insurance company will pay $46,000, but the loan is still for the full $50,000.
| Car Loan Balance – Value of the Car = Remaining Loan Responsibility |
|---|
| $50,000 – $46,000 = $4,000 |
That’s $4,000 that the customer has to pay to the lender for a car they no longer own!
Let’s look more closely at who needs GAP insurance to prevent a leftover loan balance or financial responsibility in a total loss.
Do You Have a Car Loan or Lease?
| Lease | Loan | Full Cash Purchase |
|---|---|---|
| You Need GAP Insurance. | You May Need GAP Insurance. | You Don’t Need GAP Insurance. |
You don’t need GAP insurance if you don’t have a loan or lease for the vehicle. Even with a loan, there may be other circumstances where you can skip GAP insurance.
Below are examples to help you determine whether or not you need a GAP insurance product to protect your purchase.
How Old Is the Car?
| New or Close to New (Will Depreciate A Lot Quickly) | Older (Has Already Depreciated Significantly) |
|---|---|
| You Probably Need GAP Insurance Because the Loan Is More Than the Value. | You May Not Need GAP Insurance Because the Loan Is Less Than the Value. |
Pro Tip: If you have an older pre-owned vehicle, you can likely skip the GAP insurance. That’s because the car has already depreciated by the most significant amount.
For example, a customer purchases a pre-owned vehicle for $15,000 using an auto loan with zero down. Since the vehicle is already older and pre-owned, the value will remain close to $15,000.
If the vehicle is stolen the same night as the purchase, the insurance payout will be for the vehicle’s value, which will be closer to the loan amount without a big depreciation.
Did You Make a Large Down Payment on Your New Car?
| Yes | No |
|---|---|
| You May Not Need GAP Insurance (If the Loan Is Less Than the Car’s Value) | You Probably Need GAP Insurance (If the Loan Is More Than the Car’s Value) |
Pro Tip: If you buy a new vehicle and put a large amount down, then you may be able to skip the GAP insurance.
For example, a customer buys a new car for $50,000. The customer puts $10,000 down and finances $40,000. Once the vehicle leaves the lot, it will depreciate. We’ll say it’s worth $46,000 after the purchase in this example.
With the down payment, the loan amount of $40,000 is still under the vehicle’s value of $46,000. That means an insurance payout for the car’s value will cover the remaining loan balance. GAP insurance is not needed because there is no GAP.
Pro Tip: To maximize your car’s value, make sure that your car is healthy since major mechanical problems could lead to a lower insurance payout.
Frequently Asked Questions
Is GAP Insurance the same thing as a GAP Waiver?
GAP Insurance and GAP Waivers both provide GAP coverage. A Waiver technically waives the remaining loan balance on a car after a total loss, but Insurance pays the remaining loan balance after a total loss. For the customer, the result is the same.
What happens if I don’t use my GAP insurance?
If you pay for GAP coverage but never file a claim, premiums are not refunded. However, a refund for the remaining time is available if you cancel a policy. For example, if you paid for six months of coverage but canceled after five months, you can get a refund on one month of premiums.
Can I get a refund on my GAP insurance?
GAP Insurance refunds are usually available when a policy is canceled. For example, if you pay for six months of coverage but cancel after three months, you may get a refund for the remaining three months of premiums.
What is the highest amount GAP insurance will pay?
GAP insurance only covers the difference between the insurance payout (car’s actual cash value) and the loan amount for the vehicle. GAP insurance will not cover more than the loan’s remaining balance. GAP insurance doesn’t usually cover the deductible on the collision and comprehensive coverage.
Does GAP Coverage apply to theft?
After a theft, GAP Coverage will cover the difference between the actual cash value of the car and the remaining loan balance.
Will GAP Insurance Cover Missed Payments?
GAP Insurance will not cover missed payments from before the total loss of the vehicle. Those payments remain the responsibility of the vehicle owner.
Resources
Allstate (2022, May 31). What Is GAP Insurance? Retrieved December 22, 2022, from https://www.allstate.com/resources/car-insurance/gap-insurance-coverage
Liberty Mutual (2022). What Is GAP Insurance? Retrieved December 22, 2022, from https://www.libertymutual.com/vehicle/auto-insurance/coverage/gap-coverage
Nationwide (n.d.). GAP Insurance. Retrieved December 22, 2022, from https://www.nationwide.com/personal/insurance/auto/coverages/types/gap
Jesse Cunningham V is a professional writer and licensed insurance agent. He has worked in the insurance industry in different capacities, starting as a customer service representative and working his way up to an independent agency owner. He is licensed in the states of Maryland and Pennsylvania for Property, Casualty, Life, and Health products. Jesse has worked with many national carriers, including Nationwide, State Farm, Travelers, and Liberty Mutual, and specializes in car and home insurance and health, life, accidental death, and disability insurance. He writes for multiple publications including FIXD and Bauple.com. All articles by Jesse are opinion-based. Speak with your licensed insurance agent about the particulars of your insurance before making any decisions.
