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Protecting Your Investment: Unraveling the Benefits of GAP Insurance After a Car Accident

Car ownership is a significant investment. Unfortunately, unexpected accidents can happen. In addition to having potentially catastrophic effects on your emotional and physical health, auto accidents can also be financially devastating if your car is totaled and your auto insurance won’t cover the cost of replacing it.

This is where GAP insurance comes in.

Below, we’ll take a closer look at what GAP insurance is, why it matters, and how it can help you protect your automobile investment — and your peace of mind — after a car accident. 

What Is GAP Insurance?

Short for Guaranteed Asset Protection insurance, GAP insurance is a type of coverage designed to bridge the financial gap between your car’s actual cash value (ACV) and the outstanding balance on your loan or lease in the event of a total loss due to an accident or theft.

Traditional auto insurance policies typically cover a vehicle’s ACV, which might be significantly lower than the amount you owe on your car loan or lease. This often happens with new vehicles, which depreciate rapidly in their first few years.

In fact, new cars begin depreciating as soon as you drive them off the lot, losing as much as 20 percent of their value within the first year alone.

How Does Gap Insurance Work?

Here’s a breakdown of how GAP insurance works:

Assume you pay $50,000 for a new car that is totaled a year later in an accident. While the market value of your car may be $40,000 at this time due to depreciation, your loan balance may be $46,000. This leaves a gap of $6,000 between what your car is worth and what you owe your lender.

GAP insurance covers the difference. Without it, you could be on the hook for paying off a loan for a car you don’t have anymore.

The Benefits of GAP Insurance After a Crash

GAP insurance offers many benefits, including the following:

  • Protection Against Financial Loss
    As mentioned above, GAP insurance’s primary advantage is shielding you from a potentially significant financial loss if your car is totaled or stolen. By covering the difference between your insurance payout and the remaining balance on your loan or lease, it provides a vital financial safety net at an already- stressful time.

  • Peace of Mind for Drivers
    Knowing that you have GAP insurance provides reassurance that you won’t be burdened with a substantial financial setback — even in the worst-case scenario. This peace of mind frees you to focus on moving forward after your accident without the added worry of unanticipated financial obligations.

  • Lease Coverage
    GAP insurance is especially valuable if you lease your car. Because leasing contracts are structured around paying for the depreciation of the car’s value during the lease term, GAP insurance can cover the remaining lease payments and any additional deficit if your car is totaled during this period.

GAP Insurance Coverage Key Considerations

Several factors impact your ability to qualify for GAP insurance, as well as the extent of your coverage. These include the following:

  • Eligibility Criteria
    To be eligible for GAP insurance, you typically need to have comprehensive and collision coverage. Some insurance providers also have requirements regarding the age and mileage of vehicles.

  • Financial Factors
    Factors such as down payments, loan terms, and vehicle depreciation play a role in determining GAP insurance coverage and pricing. Longer loan terms (60 months or more) and high depreciation rates make GAP insurance essential because they increase the risk of being “upside-down” on your loan. If you finance a car with a down payment of 20 percent or less (or roll over negative equity from a previous loan), you could end up owing more than the car is worth as well.

Variations in Coverage and Pricing
Different car dealerships, banks and insurance agencies offer varying levels of GAP coverage with differing pricing structures. It’s essential to comparison shop to identify the policy that best aligns with your specific situation to best protect your investment without significantly increasing your monthly payment.

GAP Insurance and Different Vehicle Types

While new cars are the most obvious candidates for GAP insurance, used cars can also benefit from GAP insurance protection against potential financial losses in the event of an accident, depending on the specifics of the situation. Certain vehicle models are prone to rapid depreciation due to market trends, making GAP insurance a smart choice. These include:

  • Ford Expedition
  • Volvo S90
  • Audi A6
  • Lincoln Navigator
  • Mercedes-Benz S-Class
  • Cadillac Escalade ESV
  • Infiniti QX80
  • Jaguar XF
  • Maserati Ghibli
  • BMW 7 Series

If you own one of these vehicle models or another depreciation-prone car, GAP insurance can be an effective way to minimize your financial losses after a car accident. 

When Can I Get Rid of GAP Insurance?

In the case of both new and used cars, once the amount you owe on your car loan or lease is less than its ACV, GAP insurance is no longer necessary and you can cancel the policy.

Contact Dunion Law Today

If you have been seriously injured in a car accident, contact Dunnion Law. We believe that each victim should have the security of compassionate and trusted legal leadership. Schedule your free consultation today.