The more expensive a vehicle and the less equity you have in it the more you can benefit from guaranteed asset protection insurance. Although the focus of GAP insurance is on your vehicle and not you, its overall objective – paying off your loan -- makes it similar in some respects to credit life and credit accident and health insurance. Because the intent of GAP insurance is to work with traditional liability coverage, it will not pay if your primary insurance company denies a claim.
GAP insurance kicks in when your primary insurer determines your vehicle is a total loss due to an accident or theft. After subtracting amounts for exclusions that may apply, GAP then pays your insurance deductible and the difference between what the primary insurance company pays and the outstanding balance of the loan. Exclusions vary from insurer to insurer but usually include past-due payments, the cost of an extended warranty financed with the vehicle and amounts the primary insurance company deducts for prior damage or excessive wear and tear. Exclusions most often also apply to after-market customizations such as custom stereo equipment.
Credit vs. Car Insurance
If your primary insurance denies a claim, GAP insurance will not pay. One of the reasons for this is that GAP is a form of credit insurance and as such insures your loan but not your vehicle. It doesn’t work the same, you pay for it differently and, in fact, some states don’t even call it insurance. GAP insurance is a one-claim policy, so unlike with traditional insurance, once you make a claim, the policy expires. Also unlike with traditional insurance, there is a single upfront premium that you can either pay out of pocket or incorporate into a loan if you purchase GAP at a dealership.
Another reason GAP won’t pay if your primary insurance denies a claim is because GAP requires a triggering event before it kicks in. Because GAP focuses on your loan instead of your car, it’s not the event itself – accident or theft – that is the triggering event but rather the moment an insurance company declares the vehicle a total loss. If the insurance company denies a claim, there is technically no loss and no reason for GAP to kick in.
Although GAP won’t pay if your primary insurance denies a claim, it may pay if there is no primary insurance. According to the International Risk Management Institute, some GAP insurance policies have a special provision for paying a claim if your primary insurance lapses. The IRMI also reports that having primary insurance isn’t necessarily a prerequisite for purchasing GAP insurance. In a case such as this, the cash value of your vehicle may be determined according to state regulations or by using a source such as the Kelley Blue Book or the National Automobile Dealers Association Guide.
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