You saved your money for years to purchase a new vehicle and finally decided to bite the bullet and purchase that brand new vehicle. You drive off the lot, probably not caring that depreciation begins that very minute you leave the lot. Things are running smoothly when a year later, you have an auto accident rendering your car a total loss! Now, suddenly you may care about depreciation when you hear from the auto insurance company that your car is only worth $20,000 and you owe significantly more than that. How can that be? When your adjuster asks if you have GAP insurance, you ask, “What is GAP insurance coverage?”
If you knew about GAP insurance when you purchased your vehicle a year ago and had a way to predict the future, you may have researched this coverage, how it works, and how it would have helped in the above situation.
What is the Purpose of GAP Insurance Coverage?
First and foremost, if you don’t have a car loan, there is no need for guaranteed asset protection (GAP insurance) so before you consider purchasing this type of coverage in the future, know what it is and whether you actually need it.
GAP insurance is designed to “fill in the gap” between what your car is worth, typically actual cash value, (ACV) and what you owe on your loan should your car be deemed a total loss due to an auto accident.
When you take out a loan on a vehicle, the initial first year of payments typically go directly to the interest on the loan and not the loan itself. What this means is if your car is totaled in the first few years, you may be offered the ACV of the car, leaving you holding the bill for the remainder of the loan balance on a car that you no longer have. This can be a source of real anger for you if you aren’t uniformed.
Details of a Total Loss
A total loss is defined when the cost to the repair the vehicle meets/exceeds 75 percent of the car’s actual cash value, or by N.C. standards, is too dangerous to repair and deemed unsafe to operate on the roads.
The ACV of a vehicle (replacement cost less deprecation) is determined by several factors such as:
- Condition (a “cream puff” or below average condition)
- The Cost to purchase a vehicle, in the local area, of like, kind, and quality.
A standard N.C. auto insurance policy is only designed to put you back in the same position you were prior to the auto accident and that is typically extending a claim payment of ACV, unless the policy states otherwise. This is where the gap can form, some wider than others, without any other applicable insurance options such as GAP insurance. GAP insurance can be purchased at your local insurance company, or the dealership for an additional premium.
Know Your Options
When you are purchasing a vehicle and assuming a loan, it is in your best interest to know your available auto coverage options. It is always wise to contact your local N.C. independent insurance agent with all of your questions on whether GAP insurance is right for you. Handling a total loss is bad enough without having to worry about filling in any GAPS.