What is Gap Insurance?
G– Guaranteed
A-Asset
P– Protection
Guaranteed Asset Protection (GAP) Insurance is an optional, add-on car insurance coverage that can help certain drivers cover the “gap” between the amount they owe on their car and the car’s actual cash value in the event of an accident.
Why is this an important coverage?
Here’s an example:
Your client Jim has just purchased or leased a new vehicle and has contacted you to make sure he has the insurance coverage he needs in case of an accident.
You help the insured add the new car to his current auto insurance policy. Will that policy provide him with enough coverage in the event of a total loss?
Unfortunately, Jim totals his brand new car after a few months of owning it. He needs to find a replacement. Will the auto insurance payment from his carrier cover the cost of the outstanding loan?
Well, if he has a standard policy, he likely will not be covered for the difference in the value of the vehicle and the outstanding loan.
According to Edmunds.com, during the first nine months of 2016, 32 percent of all cars traded in to buy new cars were “underwater”, or worth less than what their owners owed on their car loans- an average of $4,832 less!
But wait- How can a car be worth less than the outstanding loan amount?
There are many possible reasons why:
- Client put little or no money down and financed the majority of the car cost
- Client rolled over the outstanding amount from a prior car loan to finance the new car cost
- Client took out an extended repayment period (over 48 months) which applied less of the payment to the principle of the loan
- Cars depreciate in value over time, reducing the amount insurance carriers will pay in a total loss
Gap Insurance to the rescue!
Gap insurance pays the difference between what a vehicle is worth when it is stolen or totaled (when the cost to fix the car’s damage is greater than the cost to replace it) and the balance on the auto loan or lease. In other words, it fills the “gap” between the vehicle’s current value and what is still owed on it.
Be aware that there are some things gap coverage does not cover, including:
- Costs of extended warranties
- Non-refundable security deposits for leased vehicles
- Overdue lease or loan payments at the time of loss
- Lease penalties due to abnormal wear and tear, excessive use or high mileage
- Accident, credit life, disability, or health insurance associated with the loan or lease
- Carry-over balances from previous loans or leases
Since new car prices continue to climb and clients are using longer periods of financing, it is very important to talk about gap coverage and additional add-ons that can help protect your clients.
When your client contacts you to insure their new purchased or leased vehicles, be sure to include a conversion on Gap coverage and a recommendation on if the client should add it to their plan.
Another great option may be to discuss new car replacement coverage. With new car replacement coverage, if you total your new car before a set number of miles or a set period of time, your insurance company will replace the car. The replacement will be a new vehicle of the same make and model and will have the same equipment as your original vehicle.
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