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GAP Insurance–Is it Worth it?

GAP Insurance

General Asset Protection insurance (GAP) is an auto insurance policy that covers car owners when the balance owing on an auto loan exceeds the book value. A car attorney in Alaska in Alaska explains that such situations occur when a car purchased on loan is declared a total loss after a crash.

The Insurance Information Institute states that new vehicles lose a fifth of the book value after a year and that’s why the payout for a damaged car may not be sufficient to cover the loan balance. It’s important to involve a car accident attorney in Alaska to avoid being swindled by insurance companies.

When is GAP Car Insurance Necessary?

GAP insurance is necessary when the remaining balance on a car loan exceeds the actual book value, also called actual cash value–ACV. When purchasing GAP insurance, other factors like the car’s age and ownership history come into play.

Supposing A bought a car whose ACV is $25,000 but the loan balance is $28,000. Your car insurance can cover you but with a $ 500 deductible. If A is involved in a crash and the car is declared a total loss, the insurance will pay $ 24,500 (the ACV minus the deductible). A will be required to find $3,500 to offset the loan balance.

The insurance company would have paid the remaining balance ($ 3,500) if A had a GAP insurance policy. If the vehicle’s book value is more than the owing loan balance, GAP insurance isn’t necessary. However, that rule is not applicable in the following cases:

  • If the vehicle’s down payment is less than 20 percent of the car value;
  • If the rate of depreciation of a car is higher than usual–for example, a sports car;
  • When negative equity of an old car is transferred  into a new auto loan;
  • If the terms of the car loan  run for 5 or more years;
  • If the vehicle is involved in a car rental business.

Eligibility for GAP Insurance

Most insurance companies offer GAP coverage for new cars or those that are less than three years old. Also, you can only utilize gap insurance only when your vehicle is considered a complete loss after a crash or after a car theft. However, rules, terms, and conditions for issuing GAP insurance vary among insurance companies, including:

  • You must first be an existing client with an active car insurance policy, such ascollision or comprehensive coverage;
  • You must be the original owner of the car, and/or
  • Your car loan must be from a specific financial institution.

Alternatives to GAP Insurance

A good alternative to GAP insurance is the "new car replacement" insurance which covers the total loss of a crashed car. The coverage will help you buy a new car (same make and model) minus deductibles. Alternatively, the money can be used to offset your auto loan if you’re not interested in a new car–that’s why the New Car Replacement insurance is more expensive than GAP insurance.

GAP insurance is worth it when purchasing a vehicle through auto-financing and the car’s book value is less than the owing balance of your auto loan. 

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