Last Updated on November 23, 2020 by Andrew Lee
A lot of people assume that if they are in a car accident and their car is totaled, or if their vehicle is stolen, that their insurance company will pay the entire remaining balance that they owe on a car if there is any. The fact of the matter is the insurance policy will only pay out what the car is actually valued at in the state that it was in before the accident or theft. But you may still owe more money on the lease that you’re now responsible for out of pocket. GAP (Guaranteed Asset Protection) insurance is a type of coverage that would help you in this case. While GAP insurance wouldn’t typically cover mechanical failure, we can take a deeper look at how gap failure works and see if there are any circumstances in which gap insurance would cover mechanical failure, if there are any.
How Does GAP Insurance Work?
In the situation described above, it was discussed that your typical car insurance policy will likely not pay for the entire amount you owe on your lease but instead will pay the value of your car. When you drove your car off the lot it started to depreciate immediately. Pair this up with the fact that you likely have the interest to pay on the value of the car and chances are if anything happens to the car your car insurance will not cover what you owe.
Say for example you owe $25,000 on a car loan but the car is totaled after you’ve only made about $3000 in payments. The car has already depreciated in value meaning the value is now estimated by your insurance company at $19,000. Let’s say you also have a $1000 deductible that you have to pay so your physical damage payout from your policy would only $18,000 but unfortunately, you owe $22,000 on the loan. This is where GAP insurance would come into play. Your GAP insurance could cover the remaining $4000 that you owe.
Learn more about how GAP insurance works when leasing a vehicle.
Do You Need GAP Insurance?
GAP insurance is a policy that can cover the difference or bridge the gap. GAP insurance will pay for the portion of your balance that your car insurance policy will not. GAP insurance is not a required type of auto insurance in any state, so most people do not have it at all.
If you have recently purchased or leased a car you will probably want to include GAP insurance. If you get into an accident at any point during the terms of your contract and you end up in a situation where the car is totaled or stolen, you don’t want to owe thousands of dollars on a car that you will no longer be able to drive. Having GAP insurance could save a driver a lot of money.
If you paid for your vehicle in full and don’t owe on the car you wouldn’t need GAP insurance because you won’t have payments that you owe on a lease. The GAP insurance could still cover deductible amounts but given the amount you would have to pay yearly for the policy this probably wouldn’t be a very beneficial idea.
You also wouldn’t need GAP insurance if you paid a high down payment for your vehicle and therefore it isn’t depreciating against the amount you owed as much as if you had only put a minimal amount down for the initial down payment.
Getting GAP insurance is a completely personal choice some people never have it and never go through the experience of owing for a car that was totaled or stolen. Other people have GAP insurance and find that it comes in handy when they most needed.
What About Mechanical Failure?
The answer to this question isn’t so black and white. This is a type of insurance where it is going to depend on the situation that resulted in the mechanical failure and how they processed your initial claim following the incident.
If the mechanical failure is the result of a car accident and the insurance company deems that it is more expensive to repair your car than the actual value of the car, they may decide to just pay you for the value of your car. Now if you leased or took a loan out on this car you could be faced with the problem of owning more for the car than it is worth. The problem is that this is another case where you would be without the car but still have to make payments. This would be an instance where GAP insurance would indirectly cover mechanical failure.
A good way to determine if GAP insurance will cover mechanical failure is to determine if the mechanical failure is the result of something that is covered by your original policy.
When Does GAP Insurance Not Pay?
If your car insurance has lapsed or the incident that occurred which resulted in your car’s damage or loss is not covered by your insurance than the gap pay won’t come into play. Also, any outstanding late payments that you owed on the balance would be deducted from the amount that your GAP insurance will cover.
Gap insurance also will not factor in if the car is not considered completely totaled. Gap insurance is only effective when you are no longer able to drive the car.
Finally, GAP insurance will not cover damage that you’ve done to others property and it will not cover damage that you yourself inflict on your own vehicle.
Overall, whether or not you get GAP insurance depends completely on your situation. Sometimes it can be very beneficial to have it in case something happens, and other times drivers will find that they are completely fine without it. You have to assess your personal situation and determine if GAP insurance is something you’d likely need.