GAP Policy Insurance: All You Need To Know

Posted on: Jun 8, 2022 | 3 Min | Written by: HDFC ERGO Team

GAP Policy Insurance: All You Need To Know

Car owners usually take a lot of care when it comes to their cars. From regular maintenance to cleaning the vehicle to driving it safely on the roads. However, if your car is stolen or totalled, the insurance company will only pay the depreciated amount of the car. If your car is on a loan or lease, there might be a difference between the amount that you owe versus the amount that your car insurance policy pays you.

The value of a car depreciates every year. In fact, depending on the model, the value of a car might depreciate by as much as 20% in the very first year. This is where the GAP insurance or GAP protection insurance comes into the picture. It provides coverage when your loan balance or lease balance is more than what your car is worth at the time of being stolen or totalled.

Coverage and Benefits of GAP Insurance

GAP insurance, or guaranteed asset protection, is an additional coverage of a car insurance policy. This is not available in India. GAP is best when bought together with collision insurance or under a comprehensive insurance policy. The insurance will help you if your car gets stolen or suffers a total loss due to an accident.

GAP policy insurance typically pays the difference, or "gap," between an asset's depreciated value and what's owed on a loan. This can be very beneficial if you have a long-term loan or made a small down payment since new car depreciation is much steeper in the first few years of a purchase. It ensures that you do not have to pay out-of-pocket to settle your loan in case your car gets totalled or stolen.

Benefits of GAP Insurance

The following are some of the benefits of GAP insurance.

Financial Security:

One of the main benefits of GAP value cover is the peace of mind it offers. Knowing that you won't be burdened with a hefty loan balance if your car is totalled is a significant relief.

Protects Investment:

By covering the difference between your car’s value and the loan balance, GAP insurance helps protect your investment and your credit score.

Affordability:

Compared to the potential out-of-pocket expense you might face without it, having GAP protection insurance is relatively affordable.

Key Features of GAP Insurance

The following are some of the key features of GAP insurance

1. Wide Range of Coverage

GAP protection insurance is flexible and can be used in many situations, whether you're financing, leasing, or buying your car outright. It's especially great for new cars, as they depreciate fast.

2. Easy Integration with Existing Policies

GAP insurance is normally bundled into existing auto insurance, which makes it easier to handle and sometimes cheaper due to the multi-policy discount.

3. Available for New and Used Cars

GAP insurance is most commonly associated with new cars. However, it is also available for used cars, provided they are financed. This flexibility makes it an attractive option for a broad range of car owners.

Requirements and Eligibility for Car GAP Insurance

Who Needs GAP Insurance?

Not everyone will need GAP insurance, but it is highly recommended for those who fall into the following categories:

• Have a long-term loan (60 months or more)

• Made a small down payment (less than 20%)

• Have a high-interest loan

• Drive a vehicle that depreciates quickly

Eligibility Criteria

For your car to be eligible for GAP insurance, it usually needs to be below a certain age. Typically, this should be less than 10 years, with a loan balance that is higher than the current market value of the vehicle. Maintaining a comprehensive insurance policy and collision coverage as part of your primary auto insurance might also be a requirement of your lender or leasing company.

Factors Influencing the Need for GAP Insurance on Cars

Factors that determine the necessity of GAP insurance for automobiles are:

1. Vehicle Depreciation

Cars, especially new ones, depreciate so fast. The moment you drive off the lot, the car's value plummets. This rapid depreciation can leave you with a substantial gap between the loan amount and the car's market value.

2. Loan Terms

Low monthly payments on long-term loans can leave more of the balance unpaid for longer, increasing the potential gap. Likewise, loans that carry a high interest rate also can exacerbate this issue.

3. Down Payment Amount

A small down payment means a larger loan amount. This increases the likelihood of owing more than the car is worth at any given time.

Advantages of GAP Insurance

The benefits of having GAP insurance are:

1. Protects Your Finance

GAP insurance saves your finances just in case you suffer a total loss of the car. Without this protection, you will stand a chance to settle for a vehicle that you do not have.

2. Enhances Peace of Mind

Just knowing that your financial obligations are taken care of can provide substantial peace of mind. This is critical in stressful situations like a car accident.

3. Affordable Coverage

GAP insurance is relatively inexpensive, considering that it can alleviate a potential financial burden. Many insurance providers offer it as an addition to your existing auto insurance policy for a modest premium increase.

4. Supports Loan and Lease Agreements

Most loan and lease agreements enforce GAP insurance to remove risks for both the lender and the borrower from a 'total loss' situation.

Conclusion

In conclusion, GAP policy insurance is an invaluable tool for car owners looking to protect themselves from the financial burden that can arise from vehicle depreciation and outstanding loan balances.

By covering the gap between your car's value and the loan amount, GAP insurance provides peace of mind and financial security. Make sure to evaluate your specific situation and research various insurance providers to find the best GAP value cover for your needs.

FAQs

1. What is GAP Insurance?

GAP insurance, or Guaranteed Asset Protection insurance, is designed to cover the difference between the outstanding loan amount on your vehicle and its actual cash value in the event of a total loss.

2. Who Should Consider GAP Insurance?

GAP insurance will be ideal for those who lend their car for use over a long period, anyone making small down payments, and any vehicle that depreciates quickly. It also benefits people with leased vehicles.

3. How Much Does GAP Insurance Cost?

The premium of GAP insurance varies but is normally quite affordable. It can be a small addition to your existing car insurance premium or cost an one-time fee if purchased separately.

4. Is GAP Insurance Available for Used Cars?

Yes, GAP insurance is available for used cars provided they meet the eligibility criteria set by the insurance provider.

5. Can I Cancel GAP Insurance?

Yes, GAP insurance usually can be cancelled, but cancellation policies differ among insurers. Some insurance providers may offer a pro-rated refund in case you cancel the policy before the term is up.

Disclaimer: The above information is for illustrative purposes only. For more details, please refer to the policy wordings and prospectus before concluding the sales.

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