Every auto insurance company has its specific policies, but there are a lot of commonalities between the insurance types that they offer. A kind of insurance offered by many different auto insurance companies is known as GAP insurance.

In addition to being offered by many companies, this is also an insurance type that is confusing to many people. What does GAP insurance cover? What is the gap? How do you know if you would be eligible for gap coverage? All of these questions come up time and time again.

Today, we will untangle the web of confusion that surrounds gap coverage. By learning more about this insurance type, you will quickly realize whether or not you need this type of coverage for your car at this time.

What Is GAP Insurance Coverage?

In case you are unfamiliar with GAP insurance coverage, let’s start with a basic definition. GAP insurance coverage is a type of auto insurance coverage that is intended to help you bridge any difference between the actual cash value of your car and the amount of money you still owe on the car at the time of an accident.

Let’s say, for example, that your car is totaled in a no-liability accident. At the time of the accident, your car is worth $15,000 according to the auto insurance settlement.

However, you just recently bought the car and still owe $18,000 in car loans. Your gap insurance coverage would reimburse up to $3,000 to help you cover the “gap” in value.

This insurance type isn’t right for every situation, but it can save some drivers from financial burden when appropriately used.

“Gap” Is an Acronym

Many people falsely believe (and we totally get why!) that the “gap” in gap coverage represents the gap between their loan principal and the value of their car at the time of an accident. While this is a convenient way to learn and understand what this coverage does, GAP is actually an acronym!

GAP, in terms of GAP coverage, stands for “guaranteed auto protection” or “guaranteed asset protection.”

What Does GAP Insurance Cover?

The thing that most drivers are most curious about when researching GAP coverage is what it actually covers. The terms of gap coverage will differ from provider to provider, but it’s important to get an idea of what is and what is not covered when you have this type of auto insurance coverage.

What Is Covered:

  • The real difference between the value of your car and the balance on your car loan in the event of a covered accident.

What Is Not Covered:

  • Vehicle repairs
  • Rental vehicles while your car is being repaired
  • Down payment for a new car
  • Warranties
  • Carry-over loan balances
  • Car payments if you cannot cover them

This list might seem to include many different types of issues that aren’t related to auto payments. Why is that?

Many people falsely believe that GAP coverage will cover any “gap” in payments that occur for any reason, but that is not the case at all. GAP coverage exists to handle a particular situation: when your loan is not yet repaid, but your vehicle is worth less than you owe.

To cover any other situation, you need to have another type of auto insurance such as comprehensive or collision auto insurance. Various add-on policies from your insurance provided might protect you from these situations, but your GAP insurance coverage will not.

When Does Gap Insurance Make Sense?

GAP insurance doesn’t make sense in all situations. Many drivers will never purchase or use gap insurance throughout their entire life. When, then, is the right time to put the extra investment into this type of car insurance?

First, it is important for you to realize that you would never need to have GAP coverage on your car permanently. GAP coverage is a smart investment when used for specific, short periods; having it long-term would be a waste of money.

Usually, you should get GAP insurance whenever you are in one of the following situations:

  • Buying a new or slightly used car
  • Buying a costly car that depreciates immediately
  • Financing a car with a relatively small down payment
  • Financing a car with a loan period longer than six to 12 months
  • Little to no savings to cover any leftover car payments in the event that your car is totaled

If you are in one of those four situations, GAP insurance may be a smart choice. GAP insurance makes the most sense in the early years of car ownership when the value of your car is depreciating at a faster rate than you are paying off your car loan.

When to Stop GAP Coverage?

Usually, GAP policies should only be used until the market rate of your car plateaus. When cars are new, their value depreciates quickly and steadily. Until this plateaus, GAP insurance can be a smart line of protection against loss.

Tracking the plateau of your car’s value, though, can be confusing to track. It’s usually safer to plan for between one and three years of GAP coverage depending on your auto loan rate and term period.

Here’s the bottom line:

You want to keep GAP insurance for as long as the money that you owe on your car is greater than the value of the car. New cars depreciate up to 30% when they are driven off the lot, and continue to depreciate between 15% and 20% per year. It may take some math to figure out exactly when you need to stop GAP coverage according to the terms of your loan, but that math is worth it in the long run.

Don’t Leap the Gap

While GAP insurance is an excellent tool in the right situation, it can also be a foolish investment if there is not a chance of it helping you. As such, before you invest in GAP insurance, ask yourself a few essential questions:

  • What does GAP insurance cover that makes sense for your situation?
  • How much will your car depreciate?
  • How long is your loan term?
  • Would you be able to handle car payments without assistance if your car was totaled?

With an understanding of how GAP insurance works and the answers to these questions, you should be able to determine if adding this coverage is a smart move at this time.