GAP (Guaranteed Asset Protection) insurance is one of those vehicle expenses that seem like a waste of money until you need it. In fact, unless you’ve already been in a collision that resulted in your car or truck being declared a total loss, you may not even know what GAP insurance is, or how important it can be.
Imagine that you’re driving along a busy road, and another car swerves into your lane and hits you, causing severe damage to your car. Thankfully, you suffer only minor injuries, but you can’t say the same for your car. The insurance adjuster declares your vehicle a total loss, and the other driver’s auto insurance company offers you the current cash value of your car – say, $17,500 – to settle your property damage claims against their insured. But, you owe $21,300 to pay off your car loan. So who is responsible for the remaining $3,800 owed to your finance company? You are.
Even if the accident wasn’t your fault, auto insurance companies aren’t required to cover your remaining debt. Instead, they are only required to offer a property damage settlement based on the current cash value of your car (which they pay directly to the lienholder if you’ve financed your vehicle). Then, they take possession of your vehicle, and sell it at a salvage auction to subsidize the cost of paying the settlement. If you choose to keep your vehicle instead of signing it over to the insurance company, they will usually reduce their settlement offer by several thousand dollars to make up for what they expected to make on selling the car at auction. On top of that, auto finance companies rarely – if ever – agree to write off or reduce the balance owed on a loan just because a car is totaled, and will require you to continue making monthly payments on the loan until it’s been paid in full.
So here you are, with no insurance money (because it’s all been paid directly to the lienholder) and $3,800 in debt for a vehicle you don’t even have in your possession anymore. If you don’t have GAP insurance, you have to find a way to pay that $3,800 to the finance company, or risk a negative impact to your credit rating. But, if you do have GAP insurance, you’re in luck: that policy will cover the difference between what the insurance company paid to your lienholder, and what you actually owe, clearing the debt entirely.
So how do you know if you need GAP insurance? You’re best served by purchasing a GAP insurance policy if you:
- Lease a vehicle;
- Put less than 30% down to finance the purchase of a vehicle;
- Finance a vehicle for 60 months or longer;
- Drive 15,000 miles a year or more;
- Finance a vehicle known for high depreciation; or
- Roll negative equity from the loan on a trade-in, into a new loan on a different vehicle.
If you own a vehicle outright, or pay in cash when you purchase the vehicle, you definitely don’t need GAP insurance. If you put more than 30% down to finance a vehicle, you probably don’t need GAP insurance. (But if you don’t think you could cover a deficiency on your loan in the event of a total loss, you should certainly consider it.)
Finally, while Texas law requires all auto dealers to offer GAP insurance at the point of sale, the law also prohibits dealers from requiring any customer to purchase GAP. If you do decide to purchase GAP insurance, don’t be pressured to buy directly from the dealer. Contrary to popular belief, GAP insurance doesn’t have to be purchased when you sign the contract on your vehicle. Instead, look into adding GAP through your auto insurance provider. Premiums are usually much lower, and you can add always GAP provisions to a new policy if you ever switch insurance providers.
Here at The Loewy Law Firm, we’ve had many clients who didn’t realize how valuable GAP insurance could be until it was too late. If you’ve been involved in a serious car accident and need assistance navigating through the insurance maze, please feel free to call. We’re here to help.