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Q: What is GAP insurance, and do I need it?

Posted December 05, 2012 in Advice Column, Urbandale

A: GAP stands for “Guaranteed Auto Protection.” It is a type of auto insurance that helps cover car owners in the event of a severe accident where a vehicle is “totaled” or in the event of theft. GAP literally covers the gap between what you owe on the vehicle and its actual cash value as determined by the standard auto insurance policy.

Whether you purchase a new or used vehicle, depreciation affects the value. The rate of depreciation varies on different vehicles and is usually a result of supply and demand. If you paid cash for your vehicle, you don’t need GAP. If you borrowed money to purchase your vehicle, GAP could be a consideration. Your standard auto insurance policy is designed to pay the vehicle’s current cash value in the event of total loss — not the current loan balance.

Example: Your vehicle cost $15,000 and that’s how much you borrowed. An accident occurs and your insurance company determines a total loss. They then determine the actual cash value is $10,000; however your loan balance is $12,500. You still owe $2,500 and the lender would require full payoff. If you had purchased GAP, that “imbalance” would be covered.

So — you’re a likely candidate for GAP if you finance for 60 months or more, put less than 20 percent down, roll negative equity from a previous vehicle or buy a vehicle with high depreciation rates.

Information provided by Tab Miller and Mona Lillard, Preowned Solutions, 11010 Douglas Ave., Urbandale, 515-528-8100.

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