how does gap insurance work

how does gap insurance work

It stands for Guaranteed Asset Protection and can cover the difference between the amount you paid for your car, and the amount your car insurance policy pays out.

For example, if you crash and write off your new car a year after buying it, your insurer will only pay out its current value. This is likely to be much less than the amount you paid.

Gap insurance can also cover any money you still owe if you bought your car on finance and your car insurance pay out is not enough to repay it. Most policies last for up to four or five years, or until you make a claim.

You may be offered gap insurance by the dealership when you purchase a new car, but you can also buy a policy separately online.

It is when you crash or damage your car, and your car insurer decides that the cost of repair is greater that the value of your vehicle. This is also known as a write off.

Your car could also be considered a total loss if it is stolen and never recovered.

If your insurer decides your car is a total loss, they will dispose of it and pay you the current market value of your vehicle.

What type of policy can you get?

There are four main types of gap insurance you can choose from:

Vehicle replacement gap insurance: This covers the difference between the lump sum you get from your car insurer, and the amount your car would cost to buy new. This means you may get more than you paid to allow for the rising cost of cars.

Return to invoice gap insurance: This covers the shortfall between what your car insurance policy pays out, and the exact amount you paid for your car, and can be used for both new and second hand vehicles.

Return to value: This covers the difference between the insurance pay out and the market value of your car when you bought it. This could pay out more than return to invoice cover if you got a discount when you bought your car.

Finance gap insurance: This covers any money you owe a finance company if the insurance pay out does not repay your debt. This means you will have no car or cash after you claim, but what you owe will be paid off.

Which option you choose depends on how you bought your car, and whether you would want to buy a brand new car if yours is written off.

Gap insurance can cover you for up to five years, and comes with a maximum claim limit of between Ј25,000 and Ј100,000, depending on the policy.

What is excluded from gap insurance?

Gap insurance may not cover you in certain situations, so it is important you understand what is excluded from the policy before you buy. Common exclusions include:

Any claim where your car insurer has not declared your vehicle a total loss

Any value added by modifications made to your car after you bought it, e.g. sound system

Your car insurance excess payment over a certain amount, e.g. anything over Ј250

Total loss caused by racing, rallying or any other competitive event

If you do not hold a comprehensive car insurance policy

Check the policy documents carefully before you buy a policy so you understand exactly when you can make a claim.

To make a claim on your gap insurance policy you need to:

Make a claim on your car insurance and have your vehicle declared a total loss. Here is how to make a car insurance claim.

Contact your gap insurer before accepting any settlement offer from your car insurance company. They may take over the negotiations of your total loss claim.

Complete and return any claims form they send you. You may need to provide any supporting documents your insurer requests, e.g. your MOT certificate.

If your claim is rejected, or you are unhappy with the outcome of your claim, you should complain to your insurer. Here is how to complain to your insurer.

If you are still unhappy with their decision, you can refer your complaint to the Financial Ombudsman, who can look into your claim.

What Is a Gap Plan? How Does Gap Insurance Work?

It pays to “mind the gap.”

With group health insurance prices continuing to rise, a gap plan can be an effective solution to lowering your group’s health insurance prices without compromising benefits.

So let’s briefly unpack it.

How a Gap Insurance Plan Works

A gap plan doesn’t replace your group’s major medical health insurance policy, but you’ll want to adjust your major medical plan to achieve the desired results.

To get the biggest impact, raise the deductible on your major medical policy. We typically suggest you try to move it to $5,000.

You then set up a gap plan to cover medical expenses from whatever deductible you pick up to that $5,000 major medical deductible.

In terms of Obamacare, we’re simply moving your health insurance plan from a gold plan to a bronze plan, and using the gap plan to cover the difference (the gap) in benefits.

An Example of an Effective Gap Plan

For our example we’ll imagine that we’re going to re-structure the Dunder Mifflin employee benefits plan in a way that even Michael Scott would understand.

First, let’s assume the company currently has a group health insurance plan with a $1,000 deductible. It includes the usual benefits like a prescription drug card and an office visit copay.

1. Raise the major medical deductible. We will take their deductible (what an employee pays for medical care) from $1,000 to $5,000. Yikes!

We are leaving the other plan features – the office visit copay and the drug card – exactly as they are. To keep things simple, we’ll make sure the plan pays 100% after the $5,000 deductible (no 80/20 “coinsurance” stuff).

Raising Dunder Mifflin’s deductible will significantly lower their monthly premium for their health insurance plan. That’s where we get the savings.

2. Establish a gap plan to cover everything between $1,000 and $5,000. The gap plan will have a $1,000 deductible and will only cover $4,000 in medical care.

It will cover everything the health insurance policy covers with two differences: No office visit copay and no prescription drug card. We don’t need those because the major medical plan already provides them.

The bottom line: The cost of the gap plan will be less than the amount of money saved in switching to a higher deductible. So we have successfully lowered Dunder Mifflin’s cost (including the portion paid by employees) while keeping the same level of coverage.

(Insurance Ninja Move: If we can, we will significantly increase their savings by moving them to a partially self-funded health insurance plan.)

So we’ve used a gap plan to lower expenses and keep benefit levels the same. Will there be any real change for an employee?

Yes. An employee will now have two insurance cards instead of one. That’s it – seriously.

Small businesses and organizations all over the country are beginning to utilize gap plans with fantastic results. It’s a compelling solution to a common dilemma: the soaring cost of health insurance.

AC Forrest can give you a no-pressure, no-obligation comparison between your current coverage and the approach we outline here. We’ll summarize it on one page so you can quickly see the difference for yourself.

How does GAP insurance work when a car is totaled?

Let's play a game of "what if." Say you buy a brand-new car, and one week after buying it -- with that unmistakable new car smell still filling your nostrils -- you get in a nasty accident and total the car. (We know, we know: You're an impeccable driver, and that sort of thing would never happen to you, but just play along.) As everyone knows, a new car loses value the minute it leaves the lot; according to some estimates, a new car depreciates by 9 to 11 percent in the first day. So, if you took out a loan to buy your now-totaled car, chances are you owe more than the car is actually worth [source: Edmunds.com].

If the car owner in this scenario didn't have GAP insurance, they'd have to continue making payments on a totaled car in order to pay off the outstanding debt. How absurd! That's where GAP insurance comes into play. GAP insurance covers the difference between what a car owner owes and what his or her car is actually worth, and in some cases, it covers regular auto insurance deductibles, as well. So, instead of continuing to make payments on a car that's in the junkyard, GAP insurance swoops in and wipes the slate clean.

Why are we capitalizing GAP? It's actually an acronym that stands for "Guaranteed Auto Protection." The guarantee is that in the event of a total loss, GAP insurance will cover your financial obligations, and leave you free to start hunting for a new car, bike, scooter or whatever you choose as your replacement vehicle.

GAP insurance isn't for everyone, though. In fact, there are only a few circumstances (like the one outlined above) in which it would make sense to have GAP insurance. For a more detailed look at who does and doesn't need GAP insurance, and how much it can end up costing you, keep reading.

How does GAP insurance work after totaling a car?

There’s nothing more terrifying than getting into a serious accident.

As your vehicle collides with another car, the feeling of being out of control turns your stomach and you’re left bracing for the impact that you can’t stop.

If you’re lucky enough to walk away from the accident without any broken bones or bruises, you can start to worry about your vehicle that didn’t fare so well.

After you get past the initial shock of it all, you realize that the worst of it isn’t over. When you have full coverage insurance on a financed vehicle that’s totaled in an accident, there’s no guarantee that your loan will be paid off.

Enter your zip code above to compare car insurance rates from multiple companies at once!

When is a vehicle declared a total loss?

Before you dive in and find out how GAP insurance works, it’s helpful if you know just what turns a physical damage loss into a total loss.

If your company sends you a letter or contacts you by phone to notify you that the vehicle is deemed totaled, it means that the insurer has predicted that it will cost more to repair your car than it’s worth.

Companies will send an estimator to you to take pictures of your vehicle and to give the adjuster repair estimates.

Once the adjuster reviews the repair estimates, they will then assess the vehicle’s value at the time of the loss.

This is referred to the Actual Cash Value, which is the replacement cost minus depreciation. Since the Actual Cash Value of your car is the maximum that your carrier will pay, the car will be labeled a write-off.

Why is GAP insurance only available for leased or financed vehicles?

You can’t and shouldn’t buy GAP insurance on just any vehicle.

This supplemental form of protection is only available when you drive a vehicle that’s currently financed or leased.

That’s because the entire purpose of Guaranteed Auto Protection is to fill in the gap that’s present between your auto insurance policy and what’s due on your contract.

Why do many borrowers owe more on their loan than their vehicle is worth?

When you finance a car, you pay principal and interest each month in the form of a car payment.

While some of the payment pays down the balance of the principal that was financed, another portion of the payment goes to interest charges.

As your car depreciates in value, the gap between the balance of your loan and the value of your car grows.

A huge reason that borrowers are often upside down on their loans is when they roll negative equity over into a new car purchase. This equity will work against you if you ever have a serious loss.

It can also affect you if you don’t put down money to buy the car and you take out a long loan term. In these scenarios, having GAP is a must.

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After you have a loss where your vehicle sustains damage, it’s your duty to get to safety before doing anything else.

Once you are safe, you can worry about calling the insurance company to start the claims process.

Your own insurer will investigate the loss, contact the other parties involved, and determine the value of your car.

As long as the total loss threshold is exceeded, you’ll receive a settlement offer that includes an amount for the Actual Cash Value, projected titling fees, projected registration fees, and projected sales tax fees for a new vehicle.

The insurance adjuster doesn’t look at your loan balance when negotiating how much the carrier will pay under the comprehensive or collision coverage.

You’re required to list the lender that’s financing the vehicle as an additional insured and loss payee. This requirement protects the lender from borrowers running off with insurance settlement checks after the collateral on the loan is inoperable.

When your check for the total loss value is issued, it will be made out to you and the lender.

You need to take this settlement check to the lender to have it applied to the balance of your loan.

If the value of your car is higher than the loan balance, you’ll get the difference in a refund. If there is still money due on your loan after the check is applied, you are responsible for paying it unless you have GAP coverage.

Filing a Claim Against Your GAP Coverage

When you have GAP insurance, that GAP between the loan balance and the amount of your total loss check is covered.

How you file your claim for the benefit depends on where you purchased your coverage.

If you purchased your coverage through your auto insurance provider, you will submit proof of the balance of your loan to your claims adjuster.

If you bought coverage through your lender or the dealer, you need to get your paperwork out so that you can find your policy number.

Then, you can contact the carrier that offers the standalone coverage to file a separate claim.

The check for the payoff balance will then be issued to the finance company.

No one wants to total their vehicle, but if you have a total loss in a financed car you want to be sure that you have GAP insurance.

If you don’t have GAP coverage, it’s time to get quotes through insurance carriers. Log on to an online rate comparison site and start comparing today.

Enter your zip code below to find gap coverage that works for you!

Gap insurance (also called loan/lease payoff) applies if your car is totaled or stolen. You should consider adding this coverage if the amount left on your loan is more than your car is worth. For example, you have $25,000 on your loan and your car is only worth $20,000. This coverage will help pay off the balance of your loan—the $5,000 gap—minus your deductible.

Gap insurance protects you from depreciation. Sometimes, your car can depreciate (meaning its value drops) significantly the second you buy it. For example: A $30,000 car could drop to $27,000 when you drive it off the lot. That then leaves a "gap" between your loan amount and your car's value. If it's totaled, Progressive will pay off that gap (minus your deductible)—up to 25% over your car's value.

Amount you get without gap insurance

Amount you get with gap insurance

Example: You finance $30,000 for a new car. You've had it for a few years and have been making all of your payments. It's now worth $20,000 and you owe $25,000 on your loan. That's your $5,000 gap. If you total it, we'll pay you $25,000 (minus your deductible). Without gap insurance, you'd only get $20,000 (minus your deductible).

Keep in mind, you must have comprehensive and collision coverage on your policy to qualify for gap insurance. See more on comprehensive or collision.

Gap insurance applies any time your vehicle is totaled from physical damage and your insurance pays out. At Progressive, there are no situations in which we'll tell you that your car insurance covers your damages but your gap insurance does not apply.

Are new cars automatically insured?

Auto insurance deductibles explained

At Progressive, gap insurance only costs about $5 a month on average. It's a very affordable coverage that can provide a good bang for your buck, especially if there's a big gap between your car's value and the balance left on your loan. To see if it's worth it for you, just ask yourself if you'd want to pay off that gap…while you're trying to buy a new car. If not, add gap insurance.

Looking for an exact price for gap insurance? Get a car insurance quote online and we'll show you in just a few minutes.

Add gap insurance if your loan amount is more than your car's value.

How long does gap insurance last?

Once you add gap insurance, it can apply for as long as the life of your policy. If you ever do want to remove it, you can simply make that change online or give us a call. To remove this coverage, log in to your policy online or call 866-731-8075.

At Service Centers, we’ll take care of your entire claim

Auto insurance deductibles explained

Please note: The above content is meant as general information to help you understand the different aspects of insurance. This information is not an insurance policy, does not refer to any specific insurance policy, and does not modify any provisions, limitations, or exclusions expressly stated in any insurance policy. Descriptions of all coverages and other features on this page are necessarily brief; in order to fully understand the coverages and other features of a specific insurance policy, we encourage you to read the applicable policy and/or speak to an insurance representative. Coverages and other features vary between insurers, vary by state, and are not available in all states. Whether an accident or other loss is covered is subject to the terms and conditions of the actual insurance policy or policies involved in the claim. References to average or typical premiums, amounts of losses, deductibles, costs of coverages/repair, etc., are illustrative and may not apply to your situation. We are not responsible for, nor do we endorse or approve, the content of any third party sites linked from this page. Access to such sites is being provided for informational purposes only.

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