Gap Insurance : What Is It And How Does It Work?

What Is gap insurance?

Also known as guaranteed auto protection or guaranteed asset protection, it is additional automobile coverage that protects you in the event of your vehicle being totalled or stolen. It will substitute the actual cash value of your vehicle for how much you owe. Gap insurance is only available from dealerships or financing companies.

It also helps you pay off your auto loan if you owe more than your vehicle's actual cash value in the marketplace.

Dealerships and lenders offer it as a one-time premium. It can be rolled into your loan, so you don’t have to pay out of pocket. Refer to your agreement for complete details.

Why do people need gap insurance in Canada?

There are a number of situations/factors when drivers should consider purchasing it:

• New automobile: New cars lose value as soon as you take ownership. This often creates a negative gap between the vehicle's value and the amount you owe (if you finance).
• Depreciation: Depreciation can cause the value to be less than what you owe on your loan.
• Long auto loans: Long auto loans are popular today. Many people have loans with durations of 60 months or longer. This also means that many drivers carry a balance on their loans for a longer period. This potentially creates a financial difference between finance costs and vehicle value.

Protect your finances, not just your car

Is your policy leaving you exposed? Most policies only cover the actual cash value of your vehicle, not what you owe. Gap insurance closes that gap. Get a quick quote and ensure complete protection.

Get Started

What is the purpose of gap insurance?

It provides you with financial protection against loss if your vehicle is declared a total loss after an accident. The amount of compensation provided by your insurer may not cover the cost of paying off your loan. Gap protection ensures you don't pay for it out of pocket.

Why should you buy gap insurance?

Not all drivers need it. Your need for it ultimately depends on the details of your financing and risk tolerance. Here are some reasons to buy it:

• Peace of mind: It will give you peace of mind in knowing you are financially covered if there is a complete write off.
• Reduce financial risk: You don’t have to worry about paying money out of pocket if your payout is less than you owe on your financing agreement.
• You don’t have replacement value coverage: Most policies base your vehicle value on actual cash value – or the amount it is worth before it was totalled, not how much you originally paid for it.
• You’ve upgraded your vehicle before term: If you have rolled in your current financing agreement into a new loan, you will likely owe more than your new one is worth.

How does gap insurance work?

Let's say your insurer determines if your vehicle is worth $12,000. After you pay your deductible (let’s say $500) they compensate you $11,500 to cover the loss.

Based on your financing, you still owe $15,000. This means $3,500 is still required to pay off your loan. Without it, you would be required to pay the difference.

If your insurer provides you with a compensation amount equal to your vehicle's value, gap protection is not needed.

Keep in mind that the costs for adding it will vary. It’s estimated to be about 5% of your collision and comprehensive.

What does gap protection exclude?

Exclusions will vary depending on your agreement and limits. Here are 4 common exclusions to keep in mind:

1. Any additional car modifications not installed at the factory level will not be included.
2. Extended warranties, unpaid, overdue payments, or financial penalties.
3. You need basic coverage for it to work - without it, you will not be eligible for reimbursements.
4. Any money you put down for lease or trade-in might not be included.