Gap Insurance: Do I Need One and How Does It work?

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Gap Insurance in Canada

When you are looking to trade in your old vehicle and upgrade to a new one or purchasing a new vehicle on finance, the dealership may ask you if you want GAP protection. In Canada, a lot of vehicle owner’s aren’t sure if they have the coverage or if it’s worth adding.

What Is Gap Insurance?

Gap Insurance also known as guaranteed auto protection or guaranteed asset protection, is additional automobile coverage that protects you in the event of your vehicle being totaled or stolen. It will substitute the actual cash value between your vehicle and how much you owe.

It also helps you pay off your auto loan if you owe more than your vehicle’s actual cash value in the marketplace.

All dealerships and lenders in Canada offer it as a one time premium. It can be rolled into your loan so you don’t pay out of pocket.

Why Do People Need Gap Insurance In Canada?

There are a number of factors when drivers should consider purchasing it:

  1. New automobile: New vehicles lose value as soon as you drive off the dealership parking lot. This often creates negative equity on your vehicle (The gap between your vehicle value and how much you owe on it)
  2. Depreciation: New vehicles will lose 60% of their value in the first 5 years of ownership, which will create a gap between your vehicle’s current value and the amount you owe to the lender.
  3. Long-term auto loan: Long-term auto loans are becoming very common today (Auto loans used to be up to 60 months). Nowadays many vehicle owners have their auto loan more than 60 months and up to 96 months. This also means many vehicle owners carry a balance on their loan for a longer period of time. This potentially creates a financial difference between finance costs and vehicle value.

What Is The Purpose Of Gap Insurance?

It provides you with financial protection against loss in the case your vehicle is written off after an accident. The amount of compensation provided by your insurer may not cover the cost to pay off your loan. Gap Insurance ensures you don’t pay for it out of pocket.

Why Should You Buy Gap Insurance?

Not all drivers need it. Your need for it comes down to the details of your financing and risk tolerance. Here are some reasons to buy it :

  1. Peace of mind: It will give you peace of mind in knowing you are financially covered if there is a complete write-off.
  2. Reduce financial risk: You don’t have to worry about paying money out of pocket if your payout is less than you owe on your financing agreement.
  3. You don’t have replacement value coverage: Most policies base your vehicle value on actual cash value – or the amount it is worth before it was totaled, not how much you originally paid for it.
  4. You’ve upgraded your vehicle before term: If you have rolled in your current financing agreement into a new loan you will likely owe more than your new one is worth.

How Does Gap Insurance Work?

Let’s say your insurer determines if your vehicle is worth $20000 and you still owe $25000. If your vehicle is a total loss, they compensate you $20000 to cover the loss. This means $5000 is still required to pay off your loan. Without gap insurance, you would be required to pay the difference.

What Does Gap Protection Exclude?

Exclusions will vary depending on your agreement and limits. Here are 4 common exclusions to keep in mind:

  1. Any additional vehicle modifications not installed at the factory level will not be included.
  2. Extended warranties, unpaid, overdue payments, or financial penalties.
  3. You need basic Coverage before for it to work – without it, you will not be eligible for reimbursements.
  4. Any down payment for your vehicle will not be covered.