What is GAP Insurance ?
All of us are accustomed to the concept of insuring our valuable assets against loss and damage: home & contents insurance, comprehensive motor vehicle insurance and so on.
However, not everyone is aware that there is the potential for a financial loss if their car is written off whilst it is under finance and a shortfall occurs between the insurance payout and amount still owing on the finance - despite the fact that the car is covered by comprehensive motor vehicle insurance.
Guaranteed Asset Protection (GAP) Insurance (or Motor Equity Insurance) is protection against this potential loss: it helps protect you from a shortfall between your finance payout and insured value of your vehicle if it is written off.
How does a shortfall occur?
If your vehicle is written off while it is under finance, your financier will require you to pay out the remainder of the finance contract.
At the same time, your insurance company will compensate you for the loss of your vehicle, by paying you the current market value of the car (as determined by them), or an agreed value (if you chose an agreed value policy).
Unfortunately, the amount paid to you by the insurance company is often less than the amount required to pay out the finance, which creates a shortfall between the two.
This shortfall can occur for a number of reasons, but is often due to the fact that a car's market value declines faster than the finance on the car is paid back for the first few years of its life.
What does GAP Insurance do?
If your car is written off and a shortfall does occur, normally you would have to find the cash to cover the difference between the insured amount and the finance payout (including interest, fees, etc) - even if the write-off was not your fault.
GAP Insurance covers this shortfall*. By paying a once-off premium, Gap Insurance can provide you with peace of mind for the life of your car loan. You also have the option of paying the premium as a lump sum, or adding it to the finance on your car.
What levels of cover are available?
stratton arranges the issue of several GAP Insurance products.
There are several different options available, each of which protects you against different levels of shortfall.
There is even cover available to compensate you for the inconvenience suffered, by way of an additional cash payment that you can use for any purpose that you want.
- Protects up to $40,000 of the shortfall between the comprehensive insurance payout and the balance owing on the finance*.
- Additional cover options up to $6,000.
Figure 1: Example of cover provided by GAP Protection
An example of the cover provided
A vehicle is a total loss due to an accident, fire or theft.
$30,000 is still owing on the finance borrowed, yet the comprehensive motor vehicle insurance payout for the vehicle's market or agreed value is only $20,000.
GAP Insurance can cover the $10,000 shortfall, plus (depending on the cover option that was selected) up to $6,000 cash to compensate for the inconvenience suffered.