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GAP is actually an acronym standing for “guaranteed auto protection.” This is an insurance policy you may purchase which basically covers your total vehicle expense in the event of a total loss. GAP insurance is most valuable in the early years of your new car loan. According to Edmunds.com your newly purchased vehicle has an immediate depreciation of 11% the second you drive it off the car lot. In one year, the depreciation comes in at about 20%.[1]

What is GAP auto insurance?

Depreciation isn’t the only factor that could play a part in the net value of your car being “under water.” In many cases dealerships are rolling in the costs related to the purchase into the car loan. The sticker may read $24,000. But you add in the “down payment” of $1000 also any sales tax and new car registration fees. The result is the new loan for your vehicle is approximately $25500. But with the depreciation of 11% the net book value is approximately $21,500.

In the event of an accident resulting in total loss, the insurance payout will be the $21,500, minus the standard $500 deductible, versus the amount you actually owe for the vehicle, leaving you with a potential $4500 gap. The best way to ensure you remain above water in your new vehicle purchase is to not roll in any costs associated and to put down at least 20%.

Purchasing GAP Insurance

Check with your local insurance agent. GAP Insurance can typically be added to your policy for approximately 5-6% of your total physical damage cost. For example, if your total collision and comprehensive coverage comes to $500 then your GAP insurance coverage will cost approximately $25.

With insurance carriers costs will vary depending on their rating system and availability. Getting a quote from a stand-alone GAP insurance agency can’t hurt but you will want to check their reputation and stability. You may inquire with any rating service, one being A.M Best.

Getting Out From Under

A good practice is to find out if in fact you are actually under water to start. You may wish to use Edmunds.com or KBB.com (Kelly Blue Book) to get the actual value of your vehicle. There will be a few options related to the value of your vehicle.

A new car will lose approximately 11% of value once driven off the new care lot, we have already discussed, but what about the nicks and dings that can occur from the first trip to the grocery store. Chips in the paint, slight scratches and general light wear on upholstery all aid in bringing down the value of the “new vehicle.”

To get an accurate view of your vehicles worth, take an average somewhere between the private sale and trade-in value. Compare the values when you choose excellent versus good for condition. Use whole dollars when determining the gap of your vehicle, this will make inquiring about GAP insurance coverage easier.

What GAP Won’t Cover There are several items that GAP insurance will not cover. The following lists many examples.

• Repairs to your vehicle
• The value of your car loan or balance of a loan in the case of repossession
• Monthly payments due to job loss, death or financial hardship
• The cost of a rental car while your car is in the shop
• A down payment for your new vehicle
• Loan balances on a carried over loan or loans rolled into your new vehicle loan
• Any option extended warranties added to the vehicle loan
• Any value diminishment after a car accident

Although car dealerships have the ability to offer you GAP insurance, it probably isn’t being offered to most. The benefit of writing the highest new care loans possible, by rolling in old debt, down payments, fees and taxes and extended warranties, thus creating an even larger gap, most likely outweighs the add-on of a $500 gap policy. In most cases, GAP insurance is right for anyone who has just purchased a new vehicle or is in the first year or so of doing so. Knowledge is power so determine the current value of your vehicle and make an informed decision. The $25-$50 you spend now may prove invaluable tomorrow.

Tim Iandoli writes about insurance for CarInsuranceQuotesComparison.com. The site educates consumers on ways to save money on car insurance and compare car insurance companies.

[1] http://community.nasdaq.com/News/2011-06/what-gap-insurance-does-and-does-not-cover.aspx?storyid=82449-