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GAP Coverage and Why You May Need It


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Whenever you purchase a new vehicle, your dealership will want to talk to you about GAP coverage. These sales representatives are incentivized to sell you GAP coverage, but will not likely understand what it is exactly that they are selling, and what it is truly worth to you. This is not to say you should not get GAP coverage, but you should understand what it is you are actually buying, and what other options you have.

GAP coverage, explained simply, is designed to cover the difference between what your vehicle is worth at the time of the loss and what your loan is for. It is there to prevent you from losing your vehicle in the event of an accident, and not receiving enough money from your insurance company to cover your existing loan.

This coverage is almost always offered by the car dealership you buy the car from, but often at a rate which could be considered highway robbery. Most insurance companies can add this coverage to your policy at extremely little cost, a tiny fraction of what the dealership offers you this coverage for.

Some companies refer to this coverage by different names. Apart from GAP coverage, your agent may use the vernacular of "replacement cost." This varies from state to state and company to company, and although it is not the same coverage, it acts in much the same way. Instead of paying you the additional amount to cover your existing loan, it pays you the additional amount it would take to replace the vehicle. Neither of these coverages is typically required by the financial institution supplying the loan. However, if you own the vehicle outright or paid a large amount down on your vehicle, replacement cost is your only option to protect you above the actual cash value of your vehicle.

Many insurance companies have restrictions on this type of insurance coverage based on the age of your vehicle. Often your vehicle must be within five years of the current model year to qualify, so it will often not be available for used vehicles. Your company may also require you add this coverage when you purchase the vehicle, and will not allow you to add it at a later time.

GAP coverage is also occasionally subject to a 20% cap. If not a 20% cap, there is still some kind of limit for this coverage. This means, factoring in depreciation of your vehicle, if your car is worth $10,000 at the time of the loss the most they will pay out would be $12,000. It is important to inquire to the limits of that coverage to make sure it will fully cover the difference between your loan and the value of your vehicle.

Overall GAP coverage is a good idea if you owe more on your vehicle than your vehicle is worth when you drive it off the lot. Your car dealership will offer it to you at a premium, while your insurance company will often offer this coverage for far less. Always inquire with your insurance company as to what they will offer on your purchase before buying GAP coverage through the dealership. Instead of the hundreds of dollars your dealership will ask for at the time of your purchase, getting this coverage through your existing insurance policy will often only add a few dollars to your monthly premium, meaning almost nothing up front and far less over the 5 years you can have that coverage.

Consider getting replacement cost or GAP coverage every time you purchase a new vehicle, but be sure to compare what your insurance company will offer you the coverage for before accepting the offer extended to you by the dealership you are purchasing the vehicle from.

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Kevin Charles

Associate Writer

Kevin is the newest member of the Wavez writing staff. He lives in Los Angeles and got his start as a screenplay writer. He still loves writing scripts in his free time and hopes to one day have a play on Broadway!