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What Is GAP Insurance and Do You Need It for Your Car?

It will come as no surprise to anyone when we state that buying a new vehicle is expensive. In fact, there are literally only half a dozen models that come in new at under $15,000 before taxes – all of them compact vehicles equipped with bare bones essentials.

Since the actual average people are spending is somewhere around $35,000 – $40,000, the vast majority of buyers finance this purchase. Obviously, given the value, most drivers are looking to protect their investment with insurance beyond the basics of PLPD. What you decide on will depend on several factors.

First, let’s consider the coverage you could get from a broker to protect your investment.

Here in Ontario, you can purchase optional insurance to add to your policy that protects the value of your vehicle – new – should your vehicle’s full retail value become an issue. This could include if your car is a write-off due to an accident or if it gets stolen and is never recovered. This is called a Waiver of Depreciation.

This “rider” means that should you ever have to make a claim, your insurer will not factor in depreciation on the payout. It’s important to know however that the window for purchasing this optional coverage generally expires between 24-36 months after the vehicle’s purchase date.

This type of coverage can be beneficial for new car buyers, given the reality of depreciation on a new vehicle. It’s a reality that shocks a lot of car buyers. In general, it’s estimated that a new car loses 25% of its value after the first year and then 15-25% each year that follows.

How does GAP insurance differ?

GAP insurance stands for guaranteed auto protection (or guaranteed asset protection), and it is significantly different from what you’d purchase from your broker. This is optional insurance coverage that you can buy through the dealership where you buy the car or the financing company you use to secure your loan or lease. It is not an option, feature, or benefit of an auto insurance policy you get from a broker.

The purpose of this insurance is to financially protect car owners who have leased or financed their vehicle until they are no longer in a negative equity situation. Negative equity is when your car is worth less than the amount you owe on it.

GAP insurance does not cover all situations where negative equity on your car may leave you open to financial risk. It will offer financial protection if your vehicle is a total loss when you don’t have a Waiver of Depreciation on your auto insurance policy (or are no longer eligible for it) and your car is irreparable.

The Financial Consumer Agency of Canada offers the following explanation:

If you get into an accident and your car can’t be repaired, the money you get from the insurance company may not cover what you still owe on your car loan. For example, if your insurance company decides the replacement value of your car is $10,000 but you still owe $16,000 on your loan, you will need to cover the $6,000.

GAP insurance isn’t for everyone. The only way to know for sure is to crunch the numbers to figure out how long it will be before you no longer owe more than the car is worth. To do this you’ll need to know things like:

  • The cost of the coverage offered
  • The total cost of the vehicle
  • The interest you’ll be paying over the course of the term
  • The length of the term for the financing
  • How much down payment you’ll be contributing upfront
  • How much that particular vehicle depreciates each year

Once you’ve got this information, you can then decide how much financial risk you’re willing to take on if any, and whether the premium you’re charged is worth it.

Source: Lesley Green for insurancehotline.com


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