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

May 4, 2020

Gap Insurance In Canada Is Overlooked Coverage By Many Drivers

Man shaking woman's hand at a car dealership

Gap insurance is an often overlooked and misunderstood form of insurance for your car.

When you are looking to upgrade your vehicle, or buying your first one, you may have been asked if you want to include gap protection. Many drivers are not even sure if they have the coverage or it's worth adding.

Here we will outline how it works and answer some of the most frequently asked questions to help you decide if you should include it or not.

What Is Gap Insurance?

Also known as guaranteed auto protection or guaranteed asset protection, is additional automobile coverage that protects you in the event of your vehicle being totaled or stolen. It will substitute the actual cash value between your vehicle and 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 pay out of pocket. Refer to your agreement for complete details.

Why Do People Need Gap Insurance In Canada?

Man inspecting automobile for scratches

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 value and how much you owe (if you finance).
  • Depreciation : Some vehicles depreciate fast, while others hold their value. 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 loan that are 60 months or longer. This also means many drivers carry a balance on their loan for a longer period of time. This potentially creates a financial difference between finance costs and vehicle value.

What Is The Purpose Of Gap Insurance?

It provides you with financial protection against loss if your vehicle is written off after an accident. The amount of compensation provided by your insurer may not cover the cost to pay 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 comes down to 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 totaled, 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?

Automobile showroom with blue and yellow vehicles

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 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 before 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.

Gap Insurance FAQs

New cars lose value quickly. Some can lose about 20% of their value as soon as your drive them. If you purchase a luxury vehicle or plan to purchase one with a higher than average depreciation rate, it is worth considering. Crunch the numbers to see if it makes sense for your situation.

Gap protection is meant for situations when you owe more than the car is worth. If you buy a used car, you likely wouldn't find yourself in this situation unless you financed it. Considering many used vehicles hold their value and typically have short loan terms, it may not be worth it.

Sometimes. When you purchase it as a lump sum you can get a refund for the unused amount if you pay off your vehicle. If you pay monthly, you will not be entitled to a refund, but you can cancel.

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