Bridging the GAP

Posted on June 24, 2010.

Author: Jeffrey Steele

CTW Features

It's a sad statistical fact that as a proud owner drives a new car off the dealer lot, the vehicle depreciates instantly. Here's more sobering news: the amount owed on the car is based on the price the driver paid for the vehicle. So if the vehicle were to be totaled in a wreck soon after purchase, the insurance company would reimburse the owner for the actual cash value, not the amount owed in payments.

Covering that gap is what Guaranteed Auto Protection, or GAP insurance, is all about. Buying GAP insurance is especially wise to protect a high-dollar, loaded luxury vehicle that is financed for at least four years, says Frank Darras, insurance lawyer and founder of Los Angeles-based DarrasLaw. But that's not the only scenario calling for GAP insurance.

"If you're leasing a car, it's really important," he says. "You don't own the car, but you're paying to tie the car up for five years. And you're paying an interest rate as part of your lease. You'll have a significant gap if it is totaled, because you're obligated for the entire life of the lease."

GAP insurance can also be a shrewd move if a driver owes considerably more on the trade-in vehicle than what's offered in trade, since the difference is folded into the new vehicle loan, Darras says.

Of course, there are also situations where GAP insurance is unneeded. Those who pay cash for a vehicle don't have a loan, and there's no gap, Darras says. It's also unnecessary for transactions where the loan period is 12 months or less. With such a loan, the amount financed is miniscule, and the gap will be equally tiny. A buyer who puts down 25 percent or more has already covered any potential gap.

Many car buyers who should have GAP insurance don't consider it, and it's likely a good number of them don't even know it exists. There's a reason they don't invest in GAP insurance, says Bill Pearse, vice-president of auto product strategy and design with The Travelers Companies, Hartford, Conn.

"When people purchase a new vehicle, they're excited about that new car," Pearse says. "Insurance is the afterthought of that transaction. But you really need to consider what your insurance will, A, cover and, B, cost."

Pearse reports The Travelers has offered GAP insurance for 25 years. The insurance has gained popularity as the average price of new vehicles has ballooned and as financing terms begun to stretch over 60 months, he says.

Auto insurers offer GAP insurance as a purchasable coverage, within personal auto policies. "It's an additional coverage car buyers can purchase," Pearse says. "How much more it will cost will depend upon the value of a vehicle."

On a percentage basis, GAP insurance often costs about five or six percent of the cost of the comprehensive and collision coverage, over and above that coverages. On a new car, that could equate to between $20 and $30 extra annually, depending on the insurance carrier, Pearse says.

It's worth noting insurance industry experts aren't the only ones touting GAP insurance. Says Philip Reed, senior consumer advice editor at Edmunds.com: "We strongly recommend GAP insurance for anyone who leases a vehicle, makes a down payment of less than 20 percent, finances a lengthy loan term or rolls negative equity from a past car loan into a new loan."

Pearse suggests folks leasing or buying new vehicles ask their insurance professionals what added coverage is available and recommended. "Especially in these economic times, you want to make sure that, for a small premium, you're covering the potential exposure you might have."