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Planning your financial future

What is gap insurance?

GAP insurance is a type of auto insurance that covers the difference between your loan balance and the current value if your car is totaled or stolen.

Auto insurance coverage is a must for every driver, but many people are unsure of whether extra policies such as GAP insurance are necessary. GAP stands for Guaranteed Asset Protection, and while GAP insurance may not be for everyone, it can be a very valuable coverage to have in certain situations. For this reason, it's important to understand what GAP insurance is and what to look for when purchasing this type of coverage.

GAP insurance explained

GAP insurance is a type of auto insurance that helps cover your vehicle in the event of an accident where a car is totaled, or in the event of a car theft. It provides coverage by paying the difference between what is received for a total loss or theft from the standard auto insurance policy, and what is still owed on the car. Essentially, this type of auto insurance covers the “gap” between what your auto insurance pays out based on the value of the car and the total amount you still owe.

For example, let's say you have a balance of $25,000 on your existing auto loan. However, based on depreciation your vehicle is only worth $20,000. If you're involved in an accident or if your vehicle is stolen, your auto insurance policy will reimburse you for the $20,000, because that is what your car is worth. In this example, you would still be responsible for the entire $25,000 loan balance, therefore still owe the finance company another $5,000. With GAP insurance, the $5,000 would be covered.

Where to buy GAP insurance

Many car dealerships sell GAP insurance. They make it easy to buy coverage when you purchase your vehicle, and typically roll the insurance premium into your monthly car payment. You don't have to buy it from your dealership. You can also purchase GAP insurance through an insurance agent. In fact, there are many states where insurers automatically add GAP coverage when you buy a new vehicle, so be sure to check with your agent to see if you're already covered. If you're not, then the coverage could be “endorsed” onto your policy for a reasonable premium.

Another advantage to obtaining GAP insurance with the same company as your primary auto insurance is that you will only need to file a single claim in the event your car is a total loss instead of needing to file two claims -- one with your primary insurer and the other with your GAP insurance firm.

Do you need GAP insurance?

Even if you know what to look for in GAP insurance, you must determine whether you actually need this type of auto coverage. The first thing to consider is how much you owe on your car loan and if that amount exceeds the value of your car. If it does, and the difference is large enough that it would be a financial burden for you to pay back to your finance company out of pocket, then GAP insurance is probably a good choice for you.

Still having trouble deciding whether GAP insurance is right for you? Then contact your auto insurance agent who can help you crunch the numbers. In most cases GAP insurance is relatively inexpensive and getting it can save you a lot of money and stress if a major accident or theft should occur.

For more information about other Protective products, visit our Asset Protection page.


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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective or its subsidiaries.

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