What Is Gap Insurance

Gap insurance will cover the difference between what you owe on a vehicle and what your car insurance company says it's worth....and there is a HUGE difference.  Your insurance company will only pay you the ACV - or the Actual Cash Value of your vehicle if it's totaled or stolen.  And ACV is another way to say "trade-in value" or "auction value".

Go ahead look on your car insurance policy - somewhere in all that legalese, you'll the these 3 letters - ACV.  This stipulation is on every policy written in the U.S.

What this means to you is this....because newer vehicles depreciate up to 60% in three years, most folks OWE much more on their vehicle than what it's worth.  If your vehicle is totaled or stolen, you're going to be shocked at how little your car insurance company is going to pay you.

You'll be even more shocked when you find out how large the difference is you have to pay the bank....out of your own pocket.  Here's a quick review of how to fix this serious, yet little known issue.

Your Gap Insurance Options

There are only four scenarios that apply to Gap Insurance.

One, you’re planning on buying a new or used vehicle and are considering gap insurance.

Two, you’ve purchased a new or used vehicle within the last 12 months and are considering gap insurance.

Three, you're interested in Gap but it is not offered in your State (see the table to the right to check).

And four, everyone else (if this is you, there are a couple of options).

Scenario 1 - If you're getting ready to purchase a new or used vehicle, there are 4 ways to avoid having a large gap in your insurance coverage should anything ever happen to your vehicle.

1. Put at least 20% - 30% down on any purchase;
2. Get GAP Insurance coverage from your Bank or Finance Company;
3. Get Gap Insurance from an Insurance Company;
4. Get Gap Insurance from the Automobile Dealership you're buying at - or bought at..

Let's take a look at each.

Putting 20% - 30% down is probably the smartest way to take care of it - you automatically wipe-out the typical 30% 1st year depreciation.  But with the average price of a new car at almost $26,000, coming-up with a $7,800 down-payment can be tough for a lot of people.

Getting GAP from your Bank is probably the next best option.

GAP has been around for years - particularly with Leased vehicles.  But with the huge depreciation on vehicles today, it's becoming more popular with regular bank financing as well.  Yet, it's not offered by banks - and that's ridiculous since GAP would protect their customers from a possible huge financial loss.

If your Bank offers it, have them explain it in detail.  For instance, some gap coverage's even pay your insurance deductible if your vehicle is totaled or stolen.  Also, ask if the coverage provides any money toward a replacement vehicle.

Be careful here....many Banks will only provide GAP if you agree to finance the vehicle with them as well.  Sometimes that might work for you - some times is won't.

If you've already purchased a vehicle, call them and ask if GAP is offered.

Getting Gap Insurance from an Insurance Company is also a good choice, although finding a company that offers it can be a chore.  I've only been able to find three top-notch and respectable Insurance Companies that offer Gap Insurance.

One is Progressive Insurance - we've all heard of them, right?  They offer Gap as an add-on to their regular policies, so in order to get it, you have to get car insurance with them.  Yes it can be a hassle changing car insurance companies.  But...their car insurance coverage will usually save you a few dollars and their Gap coverage is affordable.

The second company is All State Insurance -  and they have the same policy as Progressive - you have to get their car insurance.  Personally, I've found All State to be little expensive when it comes to car insurance, but it might be worth a look (they call their GAP coverage "replacement coverage").

Another option is a company that I’ve used twice in the past - Lee & Mason Financial Services, Inc..  They offer a stand-alone policy with no strings attached and it's a one time investment only.

Lee & Mason Financial Services, Inc., will provide Gap coverage to new vehicles, used car purchases or refinanced vehicles.

They’ve been around for years, are owned and backed by a large Insurance Company, and is the only non-car insurance company I ever recommend.

And finally, many Dealerships offer Gap coverage as part of the Sale process.  They'll push you very hard to buy what they sell....and like many of you, I've found that to be very annoying.

Besides, it's expensive - I've seen Dealers offer a Gap Insurance policy for as much as $500 - $600.  And then they want you to add it to your loan which effectively makes it double the cost with the interest rate of the loan tacked on.

Scenario 2 - If you’ve bought a vehicle within the last 12 months, you have a two options.

One, check with your lender or insurance company to see if gap is available.  If it is, jump on it.

And two, check out the offers that Lee & Mason Financial Services, Inc. has.

Scenario 3 - Gap Insurance is not available in your State: If you are looking at buying a new or used vehicle, and Gap Insurance is not offered in your State, you have to options.

The first would be to check with your car insurance company to see if they offer any programs to cover the GAP you'll have.

The second option would be Gap-Insurance.com.  They are the only Company (that I know of) in the U.S. that will pay the difference up to $5000 between the original purchase price of the vehicle, and the actual cash value of your vehicle at the time of the total loss.

Since there are a handful of States that don't allow "Gap Insurance" to be offered, every State in the U.S. (except California) does allow "Total Loss" policies to be written.  With this type of Policy, the only restriction is this - you have to have purchased your vehicle within the last 6 months..

To find out more, visit Gap-Insurance.com, click on the "Click To Order" button, then choose your State from the drop-down menu.

Total Loss Coverage will be highlighted just below the middle of the page.

They've been around a long time and are the only U.S. Company to help those that have folks with a vehicle that doesn't qualify for traditional gap insurance.  Total Loss Coverage from Gap-Insurance.com averages out to be about $4.90 a month....and they offer an EZ Payment Plan.

Scenario 4 - If none of the scenarios I’ve just discussed apply to you….you could have problems.  Really, the only option you have is:

Call your current Insurance Company and see if they can help - And call the Bank that has your Loan or Lease and see if they can help.

Go ahead and pick-up the phone today and call your agent or insurance company.  Ask them what they pay if your vehicle is considered a total loss.

With your current policy, will they pay the entire amount owed to the bank if your vehicle is wrecked and considered a "total loss"?

If they do not, what policy changes can be made to cover it all.  If you get lucky and they'll make a change, ask what it covers - exactly - and what does it cost.

Ask the Bank that has your lease or loan if they offer Gap Insurance and can it be added to the Loan.  If they can, good for you.  Take good notes and find out what it covers and what it costs.

After you've gathered your information, and you have an option, I’d recommend you get this coverage.

Whatever scenario applies to you, I urge you to investigate your options.  After all, not many people can afford to write a check to their Bank for more than $6000 - that's the national average of the GAP between what you owe on your vehicle and what you'll get for it if it's ever totaled or stolen.

Tom O'Leary is an Automotive Portfolio Analyst, Author and has been called a modern-day "Robin Hood" for his efforts in helping the Automotive Consumer.

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