Laura Berry is a former State Farm insurance producer and insurance expert.

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products, including home, life, auto, and commercial, and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, mainly in the insuranc...

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Reviewed by Leslie Kasperowicz
Farmers Insurance CSR 4 Years

UPDATED: Oct 18, 2021

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Here's what you need to know...

  • GAP insurance is a supplemental form of coverage that offers Guaranteed Auto Protection for leased and financed vehicles
  • When you’re buying a vehicle at a dealership, you’ll be given the option to add GAP insurance into the contract. If you’re a customer who is financing, it will add to the loan amount, and you’ll pay interest on your premiums
  • If you don’t want to pay a premium for the entire vehicle loan, you may be able to add GAP insurance to your full coverage auto insurance plan. The coverage is only available on cars that qualify, and you’ll be charged a premium for each term that you have the protection
  • New cars depreciate quickly when you buy them. If you’re buying a used vehicle, the vehicle has already depreciated but will still lose value each year of ownership
  • If you don’t put any money down, you buy a car that loses value quickly, you have a high-interest loan, or you take out a loan term longer than five years, you should consider buying GAP insurance

Financing a car could cost you more than you expect. If you get into an accident or your car is stolen, it’s possible that you could be left paying auto loan payments for a car that’s already been totaled. Unfortunately, it happens to more drivers than you would think. While it may seem unfair that most major insurers will allow this to happen, it’s necessary to realize that there is only so much that your policy can help with when you’re financing a vehicle.

A situation like this can even happen when you carry full coverage insurance on the vehicle, and the loss is covered by your carrier.

It’s essential to know the limitations of an auto insurance policy before you assume that you’re fully covered.

You’re required under your lending agreement to purchase full coverage when you finance a used car, but your auto insurer isn’t required to pay off your loan when you file a claim.

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For this type of protection, you’ll need supplemental GAP insurance. Again, your current insurer should go over this with you if you want to finance a vehicle or you’re already leasing. Still, just in case anything was missed or didn’t make sense, carry on to learn more about Guaranteed Auto Protection and how it can help you.

How much will full coverage pay when you file a claim?

Full coverage refers to an auto policy that includes comprehensive coverage and collision coverage.

Each of these physical damage coverage options is designed to pay to repair your own vehicle when you get into an accident, or you have a non-collision loss. Unfortunately, many consumers don’t understand how much their policy will pay for repairs.

Under your Personal Auto Policy, the insuring agreement says that the insurance company must pay for reasonable repair costs when you have a covered loss.

There’s not a fixed dollar limit for third-party claims, but there is a limit. This limit is called actual cash value, and it refers to the average price the vehicle is worth at the time of the loss.

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How does the company determine your car’s Actual Cash Value?

Actual Cash Value is your car’s replacement cost minus depreciation. Since depreciation is factored into the valuation when filing a claim, it’s crucial to understand how depreciation works.

When filing a claim for damage and your car is totaled, the carrier will use valuation reports and sales listings to determine how much to pay.

You’ve no doubt heard that when you buy a brand-new car, once you drive it off the lot, it’s already decreased in value? The same holds true in any situation where you purchase a vehicle. For example, when you buy a used car, the car has already depreciated by 20 percent of its value.

It may be depreciated by even more than that if you buy a car that’s a few years oldDepreciation doesn’t stop after you sign the bill of sale. In fact, every year, the value of your car will fall, which reduces the insurer’s obligation to pay.

How does GAP insurance help fill the gap?

GAP insurance is a form of supplemental insurance that you can buy through the dealer, a third-party specialty company, or your personal auto carrier.

The coverage stands for Guaranteed Auto Protection because it guarantees that your car will be paid off after filing a physical damage claim or a third-party claim.

You only use your GAP insurance after filing a claim for your comprehensive and collision coverage through your carrier. Once you accept your total loss settlement for the ACV of your car plus tax, title, and registration fees, you can file a claim for whatever the balance is on your loan.

This claim is filed against your GAP insurance benefit. Since this type of lease payoff coverage isn’t generally needed when one is outright purchasing a vehicle, there are a lot of drivers out there who don’t even realize it’s a type of coverage that’s offered. However, because of the wide range of buying options given to customers in the vehicle market, it makes sense to have coverage for any sort of situation.

Do GAP insurance providers offer any other type of protection?

Paying off a totaled vehicle with your GAP benefit is nice, but that doesn’t help you get a new car.

You have to go car shopping, qualify for a new loan, sign a new lease agreement, and make a down payment. Since not all consumers have hundreds or thousands of dollars to put down on a car, some GAP benefits will even help you make a down payment on a new car. This can be incredibly helpful to drivers who aren’t able to do this on their own. GAP coverage isn’t just a payoff protector; it’s a great way to ensure you’ll be able to afford a new ride.

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When do you need GAP insurance on a used car?

GAP is an optional coverage, and it isn’t always advisable to pay for it.

There are times where paying for GAP insurance coverage is a waste of your money. For example, don’t get GAP insurance coverage if you owe less on the car than it’s worth or intends to make larger lease payments on your loan right after buying the vehicle.

Here are some scenarios where you should pay the premium for coverage on a used car:

  • You roll over negative equity from your trade into your loan
  • You don’t put down money when you’re financing
  • You take a high-interest loan because you have poor credit
  • You buy a car that’s known to depreciate in value quickly
  • You add a lot of features on top of the sales price in the financing office
  • You take out a loan where interest is front-loaded, so principal goes down slowly

Why shouldn’t you add a GAP insurance policy to your auto loan?

It’s tempting to add on GAP insurance, warranties, alarm systems, and other features when you’re financing your car. It brings up your monthly payment but not too much. What you don’t know is that adding GAP onto your loan defeats the purpose. You don’t want your loan balance higher than what it already will be, nor do you want to be stuck with an outstanding balance you’re unable to pay.

If your loan-to-value ratio is low, why bring it up by adding hundreds or thousands of dollars in premiums?

The best way to invest in GAP insurance is to buy coverage through an insurance company. If you add the coverage to your policy, you’ll pay a premium each month until you remove the coverage. So even though it might be an overall higher average cost for you, it may end up helping in the long term, which is the most important thing to remember. GAP coverage can offer you financial protection so that you aren’t left on the hook for more than one car payment at a time.

Not all cars qualify for the GAP protection. If you’d like to price the coverage, you should get quotes from multiple carriers. You can do this by using an online quote tool and comparing the average rates of any auto insurance company that offers GAP coverage options. You’ll be able to take a look at major insurance companies to see what it will cost to be their customer before you commit to anything, which is incredibly helpful, especially if you’re looking into GAP policies. The last thing you want to do is get stuck with a loan payment you’re unable to afford.

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