GAP insurance is short for “Guaranteed Auto Protection” insurance and is critical for anyone purchasing or leasing a new model car. GAP insurance works as an extra layer of insurance coverage on top of your basic auto insurance policy. When a vehicle suffers total loss, or is considered a “write-off” by a car insurance company, standard coverage provides replacement value cost for the vehicle--also known as book value. The problem with incurring a total loss in the first couple years of ownership involves the difference between this “book value” of the car and your financial obligation to the car leasing or auto financing company. Many times when a total loss occurs you can end up owing more than you are insured for.
Lets take for a example a new 2010 BMW 535i. This car starts at around $49,000, however the Kelly Blue Book value on just the base 2010 model is anywhere between $35,025 to $41,125 depending on the condition of the car.You can see the cars “book value” has depreciated by up to 30 percent in the first year. If you purchase a car with a traditional auto loan using common factors such as no/little money down and a 7 year term than the principal balance of your car loan is probably still much higher than the replacement value. In the event of an accident your car insurance company will reimburse you for somewhere in the “book value” range while your car loan company will require full payment of the loan in order to discharge the debt you owe. In short, you are now “upside down”. With a book value less than the car balance this is a quick way to accumulate unwanted debt and possibly be subject to debt collection efforts if you can not pay the remaining balance in full.
Leasing a car is even riskier as many times the buyout value stays pretty constant for the first couple years and any total loss accident could result in even a higher obligation to the auto loan company.
How much is GAP insurance?
GAP insurance is extremely important although many car insurance companies do not offer this type of coverage in a standard policy. The cost of GAP insurance is very affordable (usually around $10-$20 extra a month) and a policyholder can always ask for this option to be removed once they feel the car is insured well enough using just the basic coverage.
How to get GAP Insurance Coverage?
GAP insurance coverage is usually offered through both car insurance companies and car financing companies. Some finance companies offer consumers an option to add a GAP waiver for an additional cost (simply tacked on your monthly loan/lease payments) while car insurance companies usually request you simply add the policy coverage to your existing policy resulting in a slight increase in premiums.
However you find GAP insurance it is certainly a worthwhile investment to avoid unwanted financial liability protection in the event of major car accident.