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How Does Gap Insurance Work

GAP is an abbreviation for guaranteed asset protection. Gap insurance covers the depreciation costs not covered by your compressive insurance. If you wonder how does gap insurance work, it helps you pay off the loan balance if your car gets totalled before you complete the full loan payment.

How Does Gap Insurance Work

Let’s look at the example below to understand how does gap insurance work:

You bought a business car on loan. At the sixth month, your car get an accident. The accident damages your car beyond repair. By the time of the accident, you had $30,000 in remaining loan repayment and one month of $5,000 in missed payment.

Since you had a comprehensive cover, your claim for compensation from your insurer. Upon valuation of your car, the insurance company ascertain that after deducting depreciation of the car and your deductibles, the car is worth $22,000.

$22,000 is the actual value that the insurance company will pay you under a comprehensive insurance cover. This does not cover the entire loan balance of $30,000 and the $5,000 missed payment.

To avoid paying the remaining loan balance out of your pocket, gap insurance comes in. It helps to cover up the amount not recognized as the actual car value by the comprehensive cover. This value is $8,000 ($30,000 – $22,000).

The $5,000 missed payment is not paid by gap insurance because it is not a loan balance in the sixth month when the accident occurred. $5,000 is a missed payment for the fifth month; hence not recognized under gap insurance.

Gap Insurance Exclusion

The $5,000 missed loan repayment brings us to a new topic. What is excluded from gap insurance?

Gap insurance is there to cover the remaining loan balance strictly. Anything that is not a loan balance will not be paid by gap insurance if your car gets wrecked.

1. Overdue payments

Overdue payments are not recognized as loan balances. The time when overdue payment was supposed to be settled has lapsed. It cannot be reflected at the accident time as a loan balance.

Overdue payments are considered your fault, and you out to pay them out of pocket. Any loan repayment whose time for payment has lapsed will majorly not be accepted under gap insurance.

That is why the $5,000 fifth-month overdue payment was not paid in our above example. However, if the accident had been experienced in the fifth month instead of the sixth month, the $5,000 would not have been considered a missed payment. Instead, it would have been recognized as a loan balance.

2. Deductibles

Deductibles are the costs of repair or replacement your pay out of your pocket for comprehensive insurance to chip in and pay the rest in case of an accident. Even though your gap insurance could cover your deductible on some special occasions, these are very isolated instances. Most times, you will have to pay deductibles out of your pocket.

3. Extended warranties

An extended warranty is not recognized under an initial loan. Instead, this is an add-on you have for your car. Gap insurance will not cover such add-ons. Extended warranty is an example of these add-ons.

When to Take Gap Insurance

Even though gap insurance is optional, there are some cases when it proves inevitable to have it. If you are wondering, should I take a gap insurance for my lease car, below are some circumstances when it could be necessary.

1. If your car was bought on loan financing

Depreciation starts the very moment you drive your car off the lot. If your car, unfortunately, gets wrecked a few weeks later, depreciation would catch up in the evaluation of the actual price for compensation by comprehensive insurance. Remember, this is a car you have bought on loan, fully or partially. The remaining balance has to be paid even after such total wreckage of your new car.

The loan balance not paid by compressive coverage could be overwhelming to pay out of your pocket. This necessitates having gap insurance just in case of such an unfortunate event.

2. If your leased car has high depreciation

Some cars depreciate highly than others. If that is the case with your car, it would be worthwhile to have gap insurance. The amount that comprehensive insurance will pay after your car is totalled will be significantly less. To cater for the high loan balance not taken care of by compressive insurance, gap insurance will do exactly that.

When to Cancel Gap Insurance

You might not need gap insurance throughout the life of loan repayment. At a point in the life of loan servicing, having gap insurance beats its purpose. At this point in loan repayment, you can cancel gap insurance if you wish.

You can cancel gap insurance if the remaining loan balance is less than the actual car value. Even if your car is damaged beyond repair and comprehensive covers pay you the minimum possible after exempting deductions and others, you can still service the remaining loan balance.

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