Auto Insurance

What is GAP insurance and do you need it?

By: Mark Gregorski on July 18, 2023
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The world of car insurance can be confusing and overwhelming, particularly when it comes to the wide range of add-ons available to customize your policy. One of these is GAP insurance, a type of coverage routinely offered by dealerships and lenders for new vehicle purchases.  

As a driver, you want to avoid overpaying for your car insurance, which means being selective about the types of coverage to include in your policy. As a result, your first instinct may be to skip over Guaranteed Auto Protection (GAP) insurance to keep your premium low. 

However, depending on your circumstances, GAP insurance can spare you from paying steep out-of-pocket costs not covered by standard car insurance. In this article, we’ll explain how it works and when it’s worthwhile to purchase it. 

What is Guaranteed Auto Protection insurance? 

Guaranteed auto protection, known more commonly as GAP insurance, is a type of car insurance add-on that protects you against financial loss if your vehicle gets totalled or stolen. It reimburses you for costs you incur when the market value of your car is lower than what you currently owe on your auto loan or lease.  

Should your car be rendered a total loss following an unfortunate incident, your insurance provider will only compensate you up to its current resale value, less the depreciation. If your insurance payout is insufficient to settle your loan or lease, you'll be personally responsible for paying the balance. The role of GAP insurance is to cover this difference, so you don't have to. 

According to most industry experts, a new vehicle declines in value by about 20% in its first year and 15% the following year, leaving a sizable, well, gap between its resale value and what the driver owes on the underlying loan. 

How does GAP insurance work? 

GAP insurance is available primarily from dealerships and financing companies, though your car insurance provider may also sell it. To qualify, you must carry collision and comprehensive coverage as part of your car insurance. 

A dealership will let you bundle gap insurance with your monthly auto loan payments, allowing you to pay it off gradually, while lending firms typically ask for a one-time fee. GAP insurance is often automatically added to the payments on a leased vehicle. 

Unlike standard auto insurance coverages, GAP insurance lasts for a limited time, usually two years. The reason is that after two years, there’s a good chance that your outstanding loan balance no longer exceeds your vehicle’s market value.  


GAP insurance in practice 

Suppose you recently purchased a new vehicle for $35,000 from a dealership. You contribute a down payment of $5,000 and finance the rest with a car loan.  

Unfortunately, you become involved in a serious collision (through no fault of your own) within a year of driving it off the lot. Your insurance company appraises your vehicle’s value at $28,000 and issues a payout of $27,500 (assuming a $500 deductible) for you to settle your loan.  

However, your current balance owing is $31,500, leaving you with a shortfall of $4,000.  

At this point, your GAP insurance would kick in to cover the difference, saving you $4,000, which you’d otherwise have to pay out of pocket. 

When should you get GAP insurance? 

There are a few instances when GAP insurance may not make sense for you, say, if you’re buying an older car used, or if you’ve already opted for a depreciation waiver (more on that below).  

However, purchasing GAP insurance makes sense if: 

  • You’re buying or leasing a new car. A newer vehicle depreciates faster than an older one, especially during the first two years. This results in a considerable gap between its market value and your remaining loan or lease obligation. 

  • Your vehicle depreciates rapidly. Luxury and high-performance vehicles are prime candidates for GAP insurance, as they decline in value quickly, thanks to their costly components and steep price tags.  

  • You’re trading in your existing vehicle. If you’ll be rolling over your old loan and have negative equity (meaning you owe more than your car is worth), GAP insurance will eliminate the risk of paying your loan out of pocket should it get wrecked. 
    Related: What is a vehicle exchange program, and is it a good idea? 

  • You made a small (or no) down payment on your vehicle. A small down payment translates to a larger auto loan, which means it'll be many years before your outstanding balance dips below your car's resale value. 

  • You’re financing your vehicle purchase with a long-term loan. If you opt for a loan term of five years or more, your monthly payments will be small. As a result, your vehicle will depreciate faster than you can pay down your principal. 

How much does GAP insurance cost? 

The cost of a gap insurance policy varies based on several factors, including the firm from which you purchased it, the type of vehicle you drive, and the length of your loan.  

On average, you can expect to pay around 5% of your collision and comprehensive coverage. According to Canadian Underwriter, gap insurance in Canada ranges from $350 to $800 yearly.  


GAP insurance vs. Limited waiver of depreciation: What’s the difference? 

Auto insurance providers in Ontario and Alberta offer an insurance add-on similar to GAP insurance. It’s called a waiver of depreciation. 

A waiver of depreciation reimburses you for the original purchase price of your vehicle should it get wrecked or stolen. In other words, your insurance provider can’t deduct the accumulated depreciation from your car’s market value when determining the payout for your claim. 

You can acquire this insurance enhancement in Ontario by purchasing Ontario Policy Change Form (OPCF) 43 (43A if you’re leasing a vehicle). If you live in Alberta, it’s called a Standard Endorsement Form (SEF) 43R

Coverage under this endorsement typically lasts 24 to 48 months for a new vehicle. To qualify, your insurance provider will require that you carry a combination of collision and comprehensive coverage.  

Is purchasing GAP insurance worth it? 

If you're planning on leasing or financing the purchase of a new vehicle, GAP insurance is one of the most practical extra coverages you can add to your car insurance.  

The cost is minimal if you roll your payments into a five-year car loan. For example, a $600 GAP insurance policy works out to a manageable $10 per month. And since GAP insurance expires after about two years, you won't have to contend with the extra expense for too long. 

GAP insurance makes less sense for a used vehicle, as it depreciates slower than a new one and is likely to be financed over a term shorter than five years. As a result, there's a much smaller difference between its market value and what you owe on the loan. 

To determine whether it makes sense to purchase gap insurance, estimate the gap between your vehicle's depreciation rate during the first two years and compare it with your expected loan balance. The more significant the discrepancy, the more advantageous it is to obtain gap insurance.  

When it's time to shop for coverage, ensure you compare quotes from multiple insurance companies to boost your chances of getting the best deal at the lowest price. 

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