What is Guaranteed Asset Protection (GAP) Insurance?

Explore our comprehensive guide on GAP Insurance, covering everything from policy details and exclusions to cost, benefits and frequently asked questions.

Updated 16 March 2024

Summary

When you buy a new car, its value starts to decline immediately, a process known as depreciation. This is especially significant in the first year, with new vehicles often losing 20% to 30% of their value. This rapid depreciation can lead to a situation where the remaining balance on your car loan is higher than the car's current market value, creating what's known as negative equity.
GAP Insurance steps in here. If your car is written off or stolen, standard car insurance covers only the current market value, which might not be enough to settle your car loan. GAP insurance is designed to cover this shortfall, ensuring you're not left with debt for a vehicle you no longer have.
The necessity of GAP Insurance depends on various factors. You'll need to consider how quickly your car depreciates compared to the rate you're paying off the loan. The steeper your car's depreciation relative to your loan repayment, the more beneficial GAP insurance might be. However, as you continue to pay off your loan and your car's value keeps depreciating, the gap might reduce, lessening the need for this insurance.
GAP policies have exclusions. For starters, if the value stated in your loan contract is more than the actual market value of your car at the start of your loan, GAP insurance won't cover you. Continuous comprehensive insurance is a must, and GAP insurance won't pay out if your primary car insurer doesn't settle the full market value in the event of a total loss. Additionally, claims related to illegal or reckless driving are usually denied.
Overall, we suggest approaching GAP insurance with caution. We've observed that it's so often sold in car yards as a high-profit add-on, but its actual value for the car owner can be questionable.
It's essential to consider whether you're in a position of positive equity (owing less than the car's worth) and adjust your car insurance's agreed value to reflect your loan amount. This can often provide adequate protection without needing an additional GAP policy. If you choose to buy a GAP insurance policy, paying for it upfront can save you from paying interest over the term of your loan.
GAP insurance can be a valuable safeguard for some car buyers, but it's not universally necessary. The key is to weigh its cost against your vehicle's depreciation rate and your loan terms. As always, read the policy details thoroughly and consider seeking advice from a financial expert.

To help you understand whether or not GAP is right for you, our guide covers:

What is Guaranteed Asset Protection (GAP) Insurance? What's Covered and What's Excluded?
Why Does GAP Insurance Exist?
How Much Does a GAP Insurance Policy Cost? What are the Alternatives?
Pros and Cons of GAP Insurance
What Insurers Offer GAP Insurance?
Our Conclusion on GAP Insurance
Frequently Asked Questions

Know This First: Can I Get GAP Insurance for a Used Car?

Yes, but there are important factors to consider:

Depreciation Rate: Used cars depreciate at a slower rate than new cars. This slower rate can reduce the potential 'gap' between your loan amount and the car's value.
Loan-to-Value Ratio: Assess the loan amount relative to the car's value. If you're borrowing close to or more than the car's value, GAP insurance might be beneficial.
Insurance Assessment: Ensure the GAP insurance terms align with the used car's value. GAP policies are arguably designed with new car depreciation in mind, making them less suitable for used vehicles.
Cost-Benefit Analysis: Evaluate if the cost of GAP insurance is justified based on the potential risk. For many used cars, the lower risk of a significant 'gap' might not warrant the additional expense of GAP insurance.

Our View: While GAP insurance is available for used cars, it's crucial to weigh its relevance against a used vehicle's slower depreciation and loan balance.

What is Guaranteed Asset Protection (GAP) Insurance? What's Covered and What's Excluded?

Guaranteed Asset Protection (GAP) insurance is a specialised type of car insurance designed to protect car owners financially if their vehicle is written off or stolen. While standard car insurance typically covers the car's current market value, GAP insurance covers the difference between this amount and the outstanding balance on the car loan.
GAP insurance helps protect those with a market-value car insurance policy because cars depreciate rapidly. In many cases, the amount you owe on your car loan can be higher than the car's actual value, especially in the initial years of car ownership.
Per MoneyHub's guide to GAP Insurance, this generally isn't an issue unless the car is written off, in which case the insurance payout may be significantly less than what the car lender is owed.
With any car write-off, you also need to factor in the excess cost, which is usually $400, $500, or as high as $1,800 in some situations (e.g., young drivers) and deduct that from your payout.
To minimise the risk of being left with no car and a debt, GAP Insurance pays off your car loan in full; your lender receives payment in full alongside the car insurance money. In summary, you no longer have a car loan and are free to start again with a clean slate.

Aside from covering the shortfall in a total loss, what other benefits do some GAP insurance policies provide?

GAP insurance policies often include a range of additional benefits, enhancing their value beyond just covering the loan-vehicle value gap. These benefits can include:

Expenses Reimbursement: If your claim is accepted, the policy may cover reasonable out-of-pocket expenses up to a specified limit, such as $300 or $500.
Hire Vehicle Costs: In the event of a total loss, the policy can cover the cost of hiring a substitute vehicle for a limited time, typically up to five days, and may provide up to $150 per day for this purpose.
Negative Equity Coverage: Some policies reimburse the amount advanced under your loan for negative equity up to a specified amount, like $1,000.
Replacement Vehicle Costs: This benefit covers reasonable costs associated with acquiring a replacement vehicle, including on-road costs, delivery charges, registration, and a purchase deposit, potentially up to $2,000.
Replacement Vehicle Insurance Premium: The first year's comprehensive motor vehicle insurance premium for your replacement vehicle may be reimbursed under the policy.
Total Loss Excess Reimbursement: If you have a total loss claim under your comprehensive motor vehicle insurance, the policy might reimburse the excess amount.
Unpaid Vehicle Insurance Premium: If your vehicle insurer deducts any unpaid comprehensive insurance premium from your total loss settlement, GAP insurance could cover this cost up to a certain limit, like $1,000.

Important: Understanding the maximum amount of all these additional benefits outlined in your policy schedule is essential. Each policy has its unique set of additional benefits, so it's essential to review your specific policy details to understand the full range of coverage provided.

What's excluded from GAP Insurance policies?

While each policy is different, these are the common exclusions to be aware of:

1. Vehicle Value vs. Loan Amount

Your GAP policy won't cover you if the value of your car listed in the loan contract is more than the car's actual market value when you took out the loan. In other words, if your loan says your car is worth more than it really is, GAP insurance won't apply.

2. Conditions of Car Insurance Payout:

Dependency on Primary Car Insurance: GAP insurance depends on your primary car insurance policy. If your primary insurer does not pay the agreed or market value for a specific reason, your GAP insurance typically may not activate.
Invalidity without Car Insurance: If your car insurance has lapsed or is not in effect for any reason, GAP insurance coverage does not apply.

3. Driver Conduct and Compliance:

Illegal or Reckless Driving: Claims will almost always be denied if the driver is involved in illegal activities like drunk driving, dangerous driving, or other forms of negligence. This includes scenarios like leaving the keys in the car, excessive speeding, or engaging in racing activities.
Non-Compliance with Legal or Safety Norms: Situations in which the driver has clearly violated legal or safety norms, leading to the loss of the vehicle, typically result in denied GAP insurance claims.

4. Financial Penalties and Additional Debt:

Exclusion of Financial Penalties: GAP insurance does not cover any additional debt that is not directly related to the car's depreciation. This includes car loan late fees, penalty interest, or default fees that may accumulate in your car finance agreement. The policy focuses solely on the difference between the car's value and the loan balance in case of a total loss or theft.

Know This: It's vital to be aware of these exclusions to ensure that you are adequately protected and to avoid surprises in the event of a claim. Given the number of exclusions usually buried in a contract, we strongly suggest reviewing your policy in detail.

Why Does GAP Insurance Exist?

A car can depreciate faster than the reduction in the loan balance. This means the car's value can, in many cases, be lower than what you owe. However, there are more reasons, as we outline below:

1. Addressing Rapid Depreciation:

Immediate Depreciation Post-Purchase: When a new car is driven off the lot, it depreciates. Within the first year, many cars lose a significant percentage (on average around 20% per MoneyHub's guide) of their value. This depreciation continues over the subsequent years at a varying rate.
Protection Against Negative Equity: In many car financing scenarios, especially with longer loan terms or minimal down payments, the loan balance can be higher than the car's actual market value. GAP insurance protects car owners from this negative equity situation in the event of a total loss.

2. Complementing Standard Car Insurance:

Filling the Coverage Gap: Standard car insurance policies cover the car's current market value, not the total amount you owe on the car loan or lease. GAP insurance bridges this gap, ensuring you're not left paying for a car written off or stolen.

3. Evolving Consumer Needs:

Increased Loan Terms and Higher Vehicle Costs: As car costs increase, so do car loan terms, which all too often extend to five or more years. Longer loan terms can increase the duration during which a car owner might owe more than the car's worth, making GAP insurance more relevant.
Consumer Demand for Comprehensive Protection: Consumers increasingly seek more comprehensive protection against unforeseen financial losses. GAP insurance responds to this demand, providing vehicle owners peace of mind.

Our View: Overall, GAP insurance responds to the evolving dynamics of vehicle ownership and financing. It addresses car owners' financial vulnerability due to rapid depreciation and high loan costs by covering the shortfall between the insurance payout and the remaining loan amount. However, while it's useful, this does not mean to say it is always offers good value for money, as we explain below.

How Much Does a GAP Insurance Policy Cost? What are the Alternatives?

According to insights from MoneyHub, the cost of Guaranteed Asset Protection (GAP) insurance typically comes as a one-time upfront payment—for instance, $500 for the entire car loan duration. However, the actual cost of your policy may vary depending on the value of your vehicle and the amount you borrow.

Know This: It's common for the cost of GAP insurance to be integrated into your car loan, allowing you to finance the policy over time. While this can make the insurance more manageable by spreading out the cost, it's important to remember that this approach also means you'll pay interest on the insurance premium as you repay the loan.

Alternatives to GAP Insurance:

1. Adjusting Car Insurance Coverage:

GAP can be avoided if you ensure your comprehensive car insurance's agreed value closely aligns with your total loan amount.
For example, if your car loan is $30,000 but your insurance only covers up to $25,000, you may want to adjust it upwards to $30,000 to ensure you're covered should disaster strike.
Regularly reviewing and adjusting your agreed value to align with your car loan debt is essential to minimise the risk of being left with a shortfall.

2. Opting for a Lower-Priced Car:

Higher-priced cars often have a larger discrepancy between the loan amount and the insurance value. Knowing a car's true market value before buying it can reduce the risk of a significant gap. However, it can be expensive to plug through higher car insurance premiums or a GAP policy.

Pros and Cons of GAP Insurance

Policies may differ, but the following pros and cons are generally applicable to GAP insurance policies:

Pros:

Financial Safety Net: GAP insurance acts as a safeguard. If your car is written off, you won't be left with a shortfall between what your car insurance covers and what you owe on your loan. By the time you deduct an excess, the shortfall can be several thousand dollars.

Cons:

Additional Cost: Adding GAP insurance to your car loan means higher monthly repayments, making the overall cost of borrowing more expensive. Unless you pay for the GAP policy in cash, you will be paying interest on what it cost for the life of the loan, as outlined in our car loan interest guide.
Potential Overpayment: When you're offered GAP insurance, it's crucial to evaluate whether you're potentially overpaying for the vehicle. It's common throughout New Zealand for loan amounts to significantly exceed the car's value, suggesting that buying the car is a bad deal. If this is the case, it's wise to challenge what you're buying.
Complex Comparison: Unfortunately, GAP insurance lacks transparency in its selling process. It's often bundled with the vehicle sale and car loan contract, making it difficult to compare options and ensure you get the best deal.
Impact of Refinancing: If you refinance your car loan, be aware that it can terminate your existing GAP insurance policy. This could necessitate purchasing new GAP coverage, adding to your expenses.
Coverage Limits: Some GAP policies have a maximum payout limit, like $5,000. If the shortfall between your loan balance and car value is more significant, you could still be out of pocket despite having GAP insurance.

What Insurers Offer GAP Insurance?

GAP Insurance is a product typically offered by various finance-related service providers, including car finance companies, brokerage firms, and car dealerships. Prominent providers of GAP policies include:

Know This: You cannot obtain GAP insurance quotes online, so it's challenging to compare different policies. You'll need to contact insurers and ask them for a quote.

Duration of GAP Insurance Coverage: The coverage period for GAP insurance generally aligns with the term of your car loan, which typically ranges from 2 to 5 years. Should you refinance your vehicle, be aware that your initial GAP insurance will not transfer to the new loan agreement, so you would need to buy another policy.

How quickly can I get a quote for GAP insurance?

Getting a quote for GAP insurance can be swift. While online quotes may not be available, contacting insurers directly often results in quick responses. Gathering a few quotes for comparison is advisable to ensure you're getting the best deal.

Our Conclusion on GAP Insurance

Car yards and car finance brokers often pitch GAP insurance alongside car financing, pushing it as a 'must have' add-on. However, the true value of GAP insurance is debatable.
GAP insurance is often overpriced for its protection, given it's usually rolled up into a car loan and paid off over many years at considerable cost. Many drivers are likely to find that a well-structured car insurance policy, with an agreed value that mirrors the loan amount, can provide similar coverage without the need for an additional GAP policy.
Furthermore, the necessity of GAP insurance comes into question when considering the position of your car's equity. If the insured value of your car exceeds the amount you owe - also known as being 'in positive equity'—then GAP insurance serves little purpose. It becomes an additional expense that doesn't just thin your wallet but could also give you a false sense of financial prudence.

Our view:

If you decide GAP insurance is worth the cost, consider how you pay for it. If you opt to include the cost of the GAP policy in your car financing, you will be paying interest on it, just as you would on the car loan itself. This inflates the cost of the policy over the term of the loan. Instead, if you can, we suggest considering paying for the policy upfront and in cash. This eliminates any additional interest, keeping the cost at face value.
Don't let the urgency of a sales pitch sway you into a hasty purchase that you may not need and later regret.

Frequently Asked Questions

The following questions provide general guidance, but as GAP insurance policies vary widely, the most accurate answers can be obtained from the agent offering the policy.

What happens if I pay off my car loan early? Does GAP insurance still apply?

If you pay off your car loan early, your GAP insurance may become redundant sooner than expected. Typically, GAP insurance is linked to the length of your car loan, so the policy might not be necessary once the loan is settled. However, policies vary, so check with your insurer for specific terms.

Can I purchase GAP at any time?

No, GAP insurance can only be taken out when purchasing your vehicle. This policy is linked directly to your car loan and is intended to start providing coverage from the moment you drive your new car. Purchasing it later would not align with the initial depreciation and financing dynamics, which are core aspects of its coverage purpose.

Can I have third-party insurance and GAP?

No, your vehicle must be covered by comprehensive insurance for the duration of the GAP policy. GAP insurance complements your primary comprehensive car insurance; it does not replace it. Third-party insurance only covers damage to other vehicles and property, not your own, making it incompatible with the protective intent of GAP insurance. GAP insurance hinges on the payout from your comprehensive policy in the event of a total loss, ensuring that any outstanding loan balance is covered.

Can I cancel my GAP Insurance policy?

Yes, you can cancel your GAP Insurance policy. Most policies allow for cancellation, but the terms vary. Some policies may offer a full refund if cancelled within a certain period after purchase, typically a 'cooling-off' period. After this period, cancellation might incur fees or provide only a prorated refund. Always check the cancellation terms before purchasing.

Is GAP insurance transferable if I sell my car but still have an outstanding loan?

GAP insurance typically relates to both the vehicle and the loan, so if you sell your car, the policy may not transfer to the new vehicle or loan. Clarifying this with your insurer is crucial, as policies can differ.

Does GAP insurance cover any mechanical failures or repairs?

No, GAP insurance is solely designed to cover the financial gap between your car's insurance payout and the remaining loan balance in case of a total loss. It does not cover mechanical failures or repairs.

Is GAP Insurance still valid if my car is repossessed?

No, typically, GAP insurance does not apply in the case of car repossession. This is for many seasons:

GAP insurance is designed to cover the difference between your car's market value and the outstanding loan balance if your car is declared a total loss due to events like accidents or theft.
When a car is repossessed, it is not considered a total loss. Instead, it's a consequence of failing to meet the loan repayment terms.
GAP insurance policies generally align with the terms of your car loan and your comprehensive insurance coverage. A vehicle's repossession typically relates to loan default rather than insurance coverage scenarios.

Reviewing your specific GAP insurance policy for any mention of repossession is important, but most standard policies do not cover this situation.