What is Gap Insurance? Everything You Need to Know
Gap insurance pays off your loan if your vehicle is totalled or stolen and you owe more than the depreciated value
Article content
You’re excited. You’ve just picked up your new $35,000 vehicle. You drive it off the lot and head for the highway to take it for a spin. You’re cruising through the last intersection before the on-ramp when… you get T-boned.
You’re okay, but your vehicle isn’t. The accident has totalled your brand-new wheels.
A few days later you hear back from your car insurance company regarding your claim. They confirm that they will be reimbursing you for the full value of your vehicle — $28,000.
“What?” you ask. “It’s worth $35,000.”
It was. But then you drove it off the lot.
In most cases, new vehicles depreciate by 20 per cent as soon as they leave the lot. Regular insurance (i.e. comprehensive and collision) covers only the depreciated value of your vehicle. Hence, in the scenario above, the insurance company is only going to pay $28,000 of the $35,000 purchase price, and you’re going to be left owing the $7,000 difference out of your own pocket.
This outcome would have been different if you had gap insurance.
What is gap insurance?
Gap insurance, sometimes referred to as “guaranteed auto protection” insurance, is extra coverage you can purchase that protects you if your vehicle is totalled or stolen and the difference between what you owe on your vehicle loan or lease is more than the actual value of your vehicle. In other words, gap insurance comes in handy when the money from your insurance company isn’t enough to cover the balance of the money you borrowed to finance your vehicle.
How much does gap insurance cost?
It’s hard to say exactly what the cost of gap insurance is, but estimates peg it at around five per cent of the cost of your collision insurance and comprehensive insurance. Depending on the type of vehicle you’re driving, this coverage can cost between $350 to $800.
Where can you purchase gap insurance?
Car dealerships and some insurance companies sell gap insurance.
Before you head over to the dealership to buy your new vehicle, though, contact your insurance company first and get a quote for gap insurance. That way when you’re at the dealership and they ask you if you would like gap insurance rolled into your monthly vehicle payment, you’ll have a second quote to compare it to. Often, gap insurance purchased from an insurance company costs less than if it were purchased from a dealership.
If you’re planning to lease your new vehicle, you’ll find in most cases gap insurance is included as part of the lease.
How long does gap insurance last?
Gap insurance coverage usually lasts for two years or less. This is because typically by this point enough of the loan has been paid back that there is no longer a gap between what you owe and the depreciated value of the vehicle. It’s best to speak with your broker or agent to confirm when this date would be, though. Your insurance company will either end the policy at this point or you will have to contact them and cancel it yourself.
Who is gap insurance useful for?
You should consider gap insurance if:
- You leased a new car
- You’re purchasing a new car
- You are financing a vehicle for 60 months or more
- You made a small (less than 25%) down payment on the vehicle, or didn’t make a down payment at all
- The vehicle is high-value (e.g., one with lots of options on it or a luxury model) and depreciates quickly
- An old auto loan was rolled into a new one
Can you buy gap insurance after you’ve bought your vehicle?
It’s not likely a dealership will sell you gap insurance after you’ve purchased your vehicle. Your chances of getting it after the purchase are better with an insurance company — but be prepared to spend a little time. You may have to make some calls before you find an insurance provider that is willing to offer it on a vehicle that has already been purchased.
Should you get gap insurance on a used car?
In most cases it’s not worth getting gap insurance on a used vehicle purchase because most used vehicles don’t depreciate as fast as a new vehicle and the loan term is usually shorter. It’s because of these two factors that the gap between what the vehicle is worth and what you owe, is smaller.
LowestRates.ca is a free and independent rate comparison website that allows Canadians to compare rates from 75+ providers for various financial products, such as auto and home insurance, mortgages, and credit cards.
Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.