A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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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 19, 2021

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Here's what you need to know...

  • While most people call it GAP insurance, GAP is an acronym for Guaranteed Auto Protection
  • GAP insurance is an optional coverage designed to close the gap between what your vehicle is worth and what you owe if it’s totaled
  • Since auto insurance policies only pay for the depreciated Actual Cash Value of a vehicle, a serious accident could have serious repercussions if you have a loss without GAP insurance
  • It’s a good idea to carry GAP insurance on a new vehicle if you made a small down payment, a loan long term, or negative equity in the loan from a trade in
  • GAP insurance can be purchased from the dealer, your credit union, or as an add-on provision through your auto insurance provider

When you buy a new car, one of the first things you need to do is protect it. In most states, you’re required by law to buy at least some auto insurance. If the vehicle is leased or financed, you’re also required to buy comprehensive and collision coverage that pays for repairs for your vehicle after a loss.

Since cars depreciate at a fast rate, it’s important to protect against that depreciation by purchasing GAP insurance.

When you’re shopping for insurance on a new car, it’s good to know that even a full coverage policy has its limitations. All standard auto insurance policies have provisions that will only pay up to the car’s Actual Cash Value.

Start comparison shopping today and ensure you have the best rate for the best coverage. Enter your zip code in our FREE comparison tool to get started!

What does Actual Cash Value mean?

Actual Cash Value might seem like a very broad term. In the insurance world, the term Actual Cash Value is used to describe how much your policy will pay when you file a damage claim. ACV is a car’s fair market value at the time of the loss plus taxes and registration fees. Unlike replacement cost valuation, ACV does factor in depreciation.

If a vehicle is totaled, the insurance company is only legally required to pay up to your car’s Actual Cash Value minus whatever deductible you carry. The amount of money that you’re offered for a total loss claim is determined by comparing several different reports. Here’s what claims adjusters use to find your ACV of your covered auto:

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How quickly do new cars depreciate?

Everyone likes that new car smell, but that beloved smell comes at a cost. While you can find some great promotions where new cars are listed at close to the same price as used vehicles, it’s important that you brush up on depreciation facts so that you know what your car will be worth in the next year or even the next month.

Cars depreciate a lot more quickly than you might think. If you’re the first owner, the car will lose value the minute that you sign on the dotted line and drive off of the dealer’s lot. After 1 minute of ownership, a car is only worth 90 percent of its value. Here’s a breakdown of values and depreciation:

  • At the end of year one, a vehicle with 15,000 miles is worth 81 percent of its True Market Value
  • At the end of year two, a vehicle with 35,000 miles is worth 69 percent of its True Market Value
  • At the end of year three, a vehicle with 45,000 miles is worth 58 percent of its True Market Value
  • At the end of year four, a vehicle with 60,000 miles is worth 49 percent of its True Market Value
  • At the end of year five, a vehicle with 75,000 miles is worth 40 percent of its True Market Value

What is GAP insurance and is it required?

GAP insurance is defined as coverage that pays for the difference between a car’s actual cash value and the amount that still needs to be paid on the existing loan. GAP insurance may also pay for your car insurance deductible and a down payment on a new replacement vehicle if your car is totaled.

State auto insurance laws say that third-party liability insurance is mandatory. The state laws don’t mandate that you carry physical damage coverage options like comprehensive, collision or GAP insurance.

You may be required to buy GAP under your lease agreement even though it’s not a legal requirement.

If you’re leasing a new car, you should look over the contract to see if GAP insurance is required separately or already covered by the leasing company. The leasing company wants to protect their property if you have a loss.

Since the depreciation would affect the lessor and not you, it’s normal for the lessor to require GAP coverage. Without this requirement, the company wouldn’t receive the car’s full value, and they would miss out on profits. Check to see if a GAP waiver is included in your contract before you buy double coverage.

When does buying GAP make the most sense?

If you are financing and your lender doesn’t require you to buy Guaranteed Auto Protection, it’s still something that you should consider purchasing. Here are a few scenarios where buying protection can pay off:

  • Your down payment was 20 percent or less of the car’s purchase price
  • You traded in an old car with negative equity and rolled the negative equity into your new loan
  • Your loan term is 60 months or longer
  • The vehicle you are buying loses value faster than the average vehicle

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How much does GAP coverage cost?

It’s important to review all of your options when you’re looking for affordable GAP. Typically, the cost for GAP through the dealer is about 50 percent more than what other providers charge.

The dealer profits off of each contract sold. Prices for GAP can range between $500 and $700 throughout the life of the loan. Adding the coverage through your loan might cost just a few dollars per month.

If you’ve declined credit union GAP coverage in the past, you can find an insurer that offers protection under a standard auto insurance policy. You must meet certain vehicle requirements, but the coverage itself is very affordable.

If you’re not happy with the offerings through your current company, start to get quotes for additional coverage now. Use our FREE online rate comparison tool and see how much GAP coverage will cost.