GAP Insurance For Cars – How Does It Work and Is It Needed For a Car Accident Lawsuit?

by | Apr 24, 2024

GAP stands for “Guaranteed Asset Protection” insurance, which is a type of insurance coverage that helps safeguard borrowers who finance or lease a motor vehicle. It protects them from being stuck with a car loan or lease balance after their vehicle is declared a total loss. This insurance bridges the “gap” between the actual cash value of the vehicle and the amount owed on the loan or lease in case of theft or an accident.

Gap insurance fills the gap between the car’s depreciated value and what you owe on the loan or lease.

However, many motorists have questions about this type of coverage – especially if they have been involved in an accident and their vehicle has sustained damage in the crash. In this article, we’ll review some of the most common questions drivers ask about GAP insurance along with some helpful tips and solutions.

Table of Contents

How GAP Insurance Works

Here’s how GAP Insurance functions:

  • Depreciation: New vehicles are known to decrease in value quickly, especially in the first few years. If your car is stolen or in an accident, your auto insurance typically pays out the actual cash value (ACV) of the vehicle at that time. However, this amount might be much lower than what you still owe on your loan or lease, especially if your down payment was small or your loan term is long.
  • Coverage: GAP insurance covers the gap between the ACV payout from your auto insurance and the remaining loan or lease balance. This ensures you aren’t left with a hefty financial burden if your vehicle is deemed a total loss and you still owe money on it.
  • Eligibility: You can usually get GAP insurance from car dealerships, lenders, or insurance companies when you finance or lease a vehicle. It’s often available as an add-on to your auto insurance policy or included in the financing agreement.
  • Cost: The price of GAP insurance varies based on factors like the vehicle type, loan or lease terms, and provider. It’s typically a one-time upfront fee or a small addition to your monthly payment.
  • Benefits: GAP insurance offers peace of mind by shielding you from financial loss if your vehicle is totaled. It’s especially helpful for borrowers with negative equity or those who finance a significant portion of the vehicle’s value.

GAP insurance serves as an additional layer of protection that many vehicle owners find reassuring.

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When Should You Consider Getting Gap Insurance?

Gap insurance might be a good idea for you if:

  • Financing or Leasing a New Car: When you finance or lease a new car and put down a small or no down payment, you could end up owing more on the loan or lease than the car’s value. Gap insurance steps in to cover the difference if the car is totaled or stolen and the insurance payout falls short.
  • Depreciation: New cars lose value quickly, especially in the first few years. If you have a loan or lease on a new car, its value may drop faster than you’re paying off the loan. Gap insurance fills the gap between the car’s depreciated value and what you owe on the loan or lease.
  • Long-Term Loans: With a long-term loan and a low monthly payment, you could be in a situation where you owe more on the loan than the car’s worth for a significant part of the loan term. Gap insurance offers extra protection during this period of negative equity.
  • High-Risk Drivers: If you’re considered a high-risk driver, you might face steep insurance premiums. In case of a total loss, the insurance payout might not cover your entire loan or lease amount. Gap insurance safeguards you from this potential financial gap.
  • No Trade-In or Down Payment: If you didn’t trade in a vehicle or make a down payment on your new car, you’re more likely to owe more on the loan than the car’s value, especially in the early months of ownership. Gap insurance gives you peace of mind by offering protection in case of a total loss.

Gap insurance can be a smart investment for drivers financing or leasing a new car, those with long-term loans, or anyone at risk of owing more on their car loan than the vehicle’s value due to depreciation or other factors.

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Real-Life Situations Where GAP Insurance Is Useful

Following are some examples that demonstrate how gap insurance can help drivers when the value of their vehicle falls short of what they owe on their loan or lease:

  • Total Loss After Buying a New Car: You buy a brand new car for $30,000, making a small down payment and financing the rest. A few months later, you’re in an accident, and your car gets totaled. But because of quick depreciation, your car’s actual cash value is only $25,000. Without gap insurance, you’d be stuck paying the $5,000 difference between what you owe and what the insurance pays out.
  • Theft of a Leased Car: You lease a car, and a few months into the lease, it gets stolen and never found. The insurance values the car at $20,000, but you still owe $22,000 on the lease. Gap insurance kicks in to cover the $2,000 difference between what the insurance pays and what you owe.
  • Rolling Over Negative Equity: Sometimes, people trade in a car with negative equity, meaning they owe more on the loan than the car’s worth. If they roll that remaining balance into a new car loan and the new car gets totaled soon after, gap insurance helps cover the negative equity from the old loan.
  • Depreciation on Long-Term Loans: If you finance a car with a long-term loan – using 72 months as an example – and put down a small down payment, over time, the car’s value drops faster than you pay off the loan. If the car gets totaled before you build equity, gap insurance covers the difference between the insurance payout and what you still owe.

If you have any questions about gap insurance, it’s a good idea to talk to your insurance company representative. They can give you more details about the available policies or answer any specific questions you have about your own coverage.

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Can I Get Gap Insurance After an Accident?

No. Usually, you cannot buy gap insurance after an accident to cover that specific incident. Gap insurance is typically bought when you finance or lease a vehicle to protect against future events. Once an accident occurs, it’s too late to add gap insurance for that particular event.

However, you may still be able to buy gap insurance for future incidents, especially if you’re financing or leasing a new vehicle or if you haven’t purchased gap insurance yet but are still eligible. Keep in mind that gap insurance coverage generally can’t be added retroactively to cover past events.

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Does Gap Insurance Cover Injuries from a Crash?

No. Gap insurance usually doesn’t cover injuries from a crash. It’s designed to cover financial losses related to the vehicle itself, such as outstanding loan or lease balances, depreciation, and sometimes other associated costs like deductibles.

For injuries from a car accident, other types of insurance usually step in, like personal injury protection (PIP) coverage, medical payments coverage, health insurance, or liability coverage if someone else is at fault for the accident.
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Where and How Can I Get Gap Insurance?

When thinking about getting gap insurance, it’s crucial to think about factors like the cost, policy terms, and the reputation of the provider for customer service and handling claims. You can usually buy gap insurance from various places, including:

  • Car Dealerships: Many car dealerships offer gap insurance when you buy or lease a vehicle. They might include it in your financing or lease deal, or offer it separately. Make sure to ask about the cost and details of the dealership’s gap insurance.
  • Insurance Companies: Most insurance companies provide gap insurance as an option you can add to your existing auto insurance policy. You can get gap insurance directly from your insurance provider when you’re buying or renewing your policy. Just reach out to your insurance agent or company to find out about adding gap insurance.
  • Specialized Insurance Providers: Some insurance companies focus on offering gap insurance. These providers might have good rates and tailor-made policies that fit your specific needs. You can look up and compare different gap insurance providers online or through insurance comparison websites.
  • Finance Companies: If you’re getting financing for your vehicle through a bank, credit union, or another financial institution, they might offer gap insurance as part of your loan deal. Check with your lender to see if gap insurance is available and how you can buy it.

When you’re thinking about getting gap insurance, make sure to compare quotes from multiple sources to find the best coverage and rates for what you need.

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Can a Car Accident Lawyer Help Me Understand Gap Insurance?

Typically, a car accident lawyer won’t directly assist you with getting gap insurance. Gap insurance is usually a separate type of coverage that you buy from your auto insurance provider, car dealership, or a specialized insurance company. It’s meant to cover the difference between what you owe on a car loan or lease and the actual cash value of the vehicle if it’s declared a total loss.

However, a car accident lawyer can still be incredibly helpful after a crash, especially in situations where gap insurance might come into play:

  • Insurance Claims: If you’re filing an insurance claim after a car accident, a lawyer can ensure you get fair compensation, which might include gap insurance benefits if applicable.
  • Legal Advice: They can offer legal advice about your rights and options after the accident, including whether gap insurance could help you, and how to navigate the claims process.
  • Negotiating with Insurers: If you’re having trouble with insurance companies, a lawyer can negotiate on your behalf to secure a fair settlement, which might include gap insurance coverage.
  • Lawsuits: If your insurance claim is disputed or you need to take legal action, a lawyer can represent you in court to pursue compensation, including any gap insurance benefits.

Even though a Cedar Rapids car accident lawyer might not handle gap insurance directly, they can still play a vital role in helping you understand your coverage and get the compensation you deserve after a car accident.

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What Other Auto Insurance Options Do I Have Besides Gap Insurance?

Absolutely, there are alternatives to gap insurance that can provide financial protection if your vehicle is declared a total loss. Here are some options:

  • Loan/Lease Payoff Coverage: Some auto insurance companies offer this coverage as an add-on to your policy. It works like gap insurance, covering the gap between what you owe on your loan or lease and the actual cash value of your vehicle if it’s totaled or stolen.
  • New Car Replacement Coverage: Some insurers offer this for new vehicles. If your car is totaled within a specific time frame (like the first year), this coverage can replace it with a brand new one of the same make and model instead of just paying out the actual cash value.
  • Credit/Debt Protection: Certain lenders offer plans that cover loan or lease balances in cases of death, disability, or involuntary unemployment. While not tailored for accidents, they can provide financial relief in specific situations.
  • Increasing Deductibles: You can opt for higher deductibles to lower your insurance premiums. While this won’t cover the gap directly, it can help offset some of the potential financial loss in an accident.
  • Smart Vehicle Selection and Financing: Choosing a vehicle with low depreciation and avoiding long-term loans with small down payments can minimize the risk of owing more than your vehicle’s worth. Making larger down payments or paying off loans faster can also build equity and reduce the need for gap insurance or alternatives.

When considering these alternatives, it’s crucial to assess your specific situation, including your loan or lease terms, your vehicle’s value, and your comfort with risk.

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Who Should Consider Getting Gap Insurance?

Some examples of people who might find gap insurance beneficial include:

  • New Car Buyers: If you’re buying a new car and financing it or leasing it, gap insurance can be crucial. It protects you if the car is totaled or stolen before you’ve paid off enough of the loan or lease to match its value.
  • Drivers with Low Down Payments: Making a small or no down payment on a car purchase puts you at risk of owing more on the loan than the car’s value, especially early on. Gap insurance provides added protection during this period of negative equity.
  • Long-Term Loan or Lease Holders: If you’ve taken out a long-term loan, like 60 or 72 months, you may owe more than the car’s worth for a significant part of the loan. Gap insurance covers the difference if the car is totaled.
  • Frequent Drivers: If you drive a lot, your car’s value can depreciate faster. Gap insurance helps offset the risk of negative equity due to rapid depreciation.
  • Leaseholders: While some leases include gap insurance, it’s essential to confirm. If not included, purchasing gap insurance separately provides added protection for leased vehicles.
  • Owners of High Depreciation Vehicles: Certain cars lose value faster than others. For example, luxury vehicles can depreciate by over 50% in just five years. Gap insurance is crucial for owners of such vehicles to protect against negative equity.

Deciding on gap insurance depends on your financial situation, loan or lease terms, and comfort with risk.

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When Should You Consider Dropping Gap Insurance?

Deciding when to drop gap insurance depends on various factors specific to your situation. Here are some instances where dropping gap insurance might be appropriate:

  • Loan Payoff: If you’ve paid down your car loan to the point where you owe less than the car’s value, you may not need gap insurance anymore. Once your loan balance matches or is less than the car’s value, there’s no longer a “gap” to cover.
  • Decreased Depreciation: If your car’s value isn’t dropping as quickly as before, or if you’ve chosen a vehicle that holds its value well, the gap between the loan balance and the car’s value may shrink. In such cases, the need for gap insurance decreases.
  • Increased Equity: If you’ve built up equity in your vehicle through regular payments or if its market value has increased, you’re less likely to be in a negative equity situation. As equity grows, the need for gap insurance diminishes.
  • Improved Financial Situation: If your finances have improved and you could cover the difference between the loan balance and the car’s value yourself, you might consider dropping gap insurance. However, think about the potential impact of a total loss and whether you’re comfortable taking on that risk.
  • Vehicle Replacement: If you plan to sell or trade in your car soon, or if you expect to pay off your loan shortly, you may not need gap insurance much longer. Assess your loan payoff timeline and drop gap insurance once you’re confident you won’t owe more than the car’s worth.

Before dropping gap insurance, review your loan terms, evaluate your vehicle’s current value, and consider your risk tolerance. Dropping it too early could leave you vulnerable to financial loss, so weigh the potential savings against the risks carefully.

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Injured In a Crash? We’ve Got You Covered

Auto accident victims often sustain injuries in those collisions – which can further complicate the post-accident road back to normal life. If you have been injured in a crash, it’s important to have someone on your side to help you navigate the road to recovery. At Injury Law Support, we help to connect injury victims with experienced, trusted lawyers that have been vetted via our team. To have a lawyer contact you and discuss the details of your claim for free, complete and submit the “Free Case Review” form on this page. There are no upfront fees and a member of the ILS network will contact you shortly.

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