Investing in guaranteed auto protection insurance can, under the right circumstances, be a wise financial decision. The more valuable your car and the more you owe on it, the more it makes sense to consider purchasing GAP insurance. In theory, GAP insurance kicks in if your primary insurance company officially lists your car as a total loss after an accident or theft. One major glitch: GAP insurance may not always pay the full balance of your loan.
The International Risk Management Institute reports that GAP insurance covers only factory-installed equipment. This applies to after-market upgrades made either before or after you take delivery of the vehicle. For example, tinted windows, better quality tires or high-end audio equipment will not be covered -- even if they are purchased and installed at the dealership and made part of the lease or loan agreement. So even if you purchase GAP insurance, you could be left with a big bill to pay if your car is stolen or totaled.
GAP insurance adjusters review your primary insurance policy and the accident or theft report and reduce the amount you’ll get depending on what adjusters find. If the primary insurance company reduces the value of your vehicle due to excessive wear-and-tear or because of previous damage you failed to repair, GAP insurance will reduce your payout by this amount. Another exclusion that can become an issue is your deductible, because some GAP insurers won’t cover your primary insurance deductible.
Adjusters also review your existing lease agreement or loan before establishing a payout amount. Whether the funding source is a lease agreement or a loan, GAP insurance reduces the final payout to account for any past due payments or the amount you paid for an extended warranty on the vehicle. In addition, if the payout amount is based on the balance of a lease agreement, GAP insurance reduces the payout for any monetary penalties the lessor assessed for excessive use and won’t reimburse a nonrefundable security deposit.
The book value of the vehicle at the time of purchase plays a significant role in determining whether adjusters make value deductions. If you had a trade-in that was overvalued to pay off an existing loan it could cause you to have negative equity or be “upside down” on your current loan. For example, if you still owe $8,000 on your trade-in that is only worth $5,000, the new car dealer can take this negative equity of $3,000 and roll it into your new car loan. In this case, you would end up with a $28,000 loan on the purchase of a new car valued at $25,000, and the most you can expect to receive in a GAP insurance payout would be original book value minus principal payments made on the loan. GAP insurers always deduct the amount of any negative equity from the final payout.
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