One of the first extras we are offered in the F&I office is to buy GAP insurance.
GAP stands for guaranteed automobile protection. It is extra insurance that covers us if our new car gets stolen or is in a totaled crash.
The GAP is the dollar difference between the current value of our car and the dollars we stole on on the car.
Most people are “underwater” during their first two years – so GAP coverage makes up the difference.
The truth is GAP is not needed – when we get into the right vehicle at the right price at the right time…
GAP – one of the most profitable insurances every sold
It fascinates me to know that (according to this 2006 insider’s article):
GAP has surpassed service contracts as the No. 1 selling product at many dealerships.
That tells us all that GAP is quite the profit center.
What exactly is GAP?
GAP coverage is an optional insurance policy for newer cars that can be added to our collision insurance policy.
Or, it can be purchased as an additional option when we buy or lease a new car at the dealership.
GAP insurance MAY pay the difference between:
- The balance due on our new car lease AND…
- The amount an insurance company pays us if we total our car (or it gets stolen).
(Notice I said MAY… because it does not ALWAYS provide coverage – more on this below.)
The GAP explained
We are told that cars lose thousands of dollars in depreciation the moment our car gets driven home for the first time.
This is usually not true, because many low-mileage cars sell for almost as much as brand new cars…
The F&I salesperson scares us. They pitch us with the scary scenario of being “underwater” – getting too little from the insurance company to pay off our new car loan in the event of a total loss.
GAP coverage pays this difference – the gap for us. It also promises to pay off the insurance deductible for us, too.
The truth about buying GAP insurance from a new car dealer
First of all, car dealers sell GAP insurance coverage at super high, inflated prices.
Most new car buyers get overpriced GAP insurance from the new car dealer after they buy (or lease) their new car.
I have personally seen naive buyers get GAP coverage costing 40 times more than fairly-priced GAP coverage.
I know two people who paid over $3,000.00 for GAP insurance (when a fair price is around $100).
Why is GAP insurance so expensive?
There are 2 main reasons normally-cheap GAP insurance is so darn expensive at the dealership:
1) Emotion and lack of knowledge
New car dealers exploit our naivete and emotional thinking to gain high profits.
They use fear porn and timing to make an easy sale.
As soon as we enter the F&I office, we are emotionally tied to our new car – and exhausted at the same time.
Our defenses are down, because we (mistakenly) think everything is done.
We are scared into buying something that (usually) makes little logical sense.
And people just want their car – they do not want to delay things by investing more time researching.
2) Discrimination protection
They also tell us this:
By state and federal law, dealerships must offer extras to everyone or face discrimination lawsuits. Imagine that! (That is the excuse they like to tell us.)
They say everyone’s driving abilities are different (and so are the risks). As a result, car dealership GAP insurance is priced (for everyone) on worse-case scenarios. And the worst-case-scenario is an unlucky new-car buyer will total their highly underwater, quickly-depreciating car just after leaving the dealership – resulting in a $15,000.00 gap.
But at the same time, they tell us this:
We get fairly-priced GAP insurance, because they can see our credit worthiness and driving history in real time. (Come again?) So responsible drivers are going to see significant savings in GAP insurance rates.
I know, I know – marketing doublespeak at its finest. Orwell would be proud.
Deconstructing GAP math
The F&I salesperson scares us by saying something like:
“Let’s say your car cost $35,000 when new, and you currently owe $30,000. If the car is totaled, the actual cash value of the vehicle may be only $25,000. You have a deductible of $500, so the car accident settlement is $24,500. Your gap insurance coverage may pay the remaining $5,500 on the loan instead of having to come up with the money yourself.”
I know a person who administers GAP coverage for an insurance company. He said the average GAP claim pays out $2,000. Yep, just $2,000 for a premium that sells for over $900… sometimes as high as $3,000.00!
If you want to know the actual cost to the dealer for GAP insurance, buy a car in a state that prohibits profit making on GAP coverage. For example, in New York state, the GAP insurance costs between $135 to $185 (not $900.00).
How do insurance companies determine a total loss payout
Insurance companies use a mysterious, secretive formula to determine total loss payouts.
Of course they do – because this allows them to keep more profit on a claim. This is why insurance companies are amongst the most profitable industries on the planet.
And this is why GAP coverage might be important to get (under the right conditions). It protects us against insurance company shenanigans if we total our car or it gets stolen.
GAP insurance MAY cover your loss
One way to stay profitable is to hide exceptions in the contract to avoid paying claims.
Of course, the F&I salesperson forgets to let us know about exceptions – so here are just a few:
We cannot be “underwater”
GAP insurance only covers us when our remaining car payments are greater than what the insurance company will pay us in cash.
So for example, if we pay a super low price for a new car (and that is the #1 reason you ordered to my leasing system), you are probably not going to be “underwater”… never ever. So you will never ever need a GAP coverage claim.
Negative-equity loans might be exempt from coverage
Most insurance companies do not cover negative equity from your trade (if you find yourself in that situation).
For example, if we owe more on our present car than it is worth and it gets “rolled” into a new car lease, the insurance company might not pay any future claims.
Switching insurance companies voids GAP coverage
If we switch insurance providers midway through our loan, GAP insurance is canceled (and we might not be able to get it again). In this case, getting GAP insurance at a new car dealer might make sense if we plan to switch insurance companies.
The fine print
Insurance companies love to collect our cash, but hate to pay it out.
One way to avoid paying claims is to say, “will not cover any prior damage”. This means insurance companies can find a rip in our seat and claim it as “prior damage.”
Watch out for hidden limits
Most insurance companies’ GAP coverage has a limit to which it covers (such as $5,000 max payout). You might ask about this before you get it.
The best way to get GAP insurance
If you still need to get GAP insurance, here is the best and cheapest way to get it…
Contact your insurance company and get a quote. It should cost from 50 cents a month to $9 a month (depending on your past responsibility history). Yep, one year of coverage should cost as little as $6 a year.
The cost of GAP insurance should be super low, because the odds of needing it are super low.
Next, mark your calendar 24 months from now – and add an entry that says, “cancel GAP insurance.” When this day arrives, contact your insurance company and cancel GAP insurance. Because (on average) after two years of new car payments, you should no longer be underwater on your loan. This strategy gets you proper GAP insurance for a lot less than $100.
If you REALLY need to roll the cost of GAP insurance into your new car lease, tell the F&I salesperson that you can get it for $100 via your insurance company – they will probably match this price (or come close).
The absolute best way to cover yourself is to avoid getting insurance at all…
Because getting a great, low lease rate on a new car all but eliminates the need to get GAP insurance.
If you got ripped off and paid for GAP insurance through a new car dealer in the recent past, I might have great news for you…
You can cancel the insurance and get a straight line, pro-rated refund. It is divided up evenly over your loan period. This means if you ask for a refund a month after getting your new car, you are going to get most of your premium back as a cash refund!
“How do I know if GAP insurance is included in my lease?”
Check your lease agreement and see if there is a section about a “GAP waiver”. This is technically not GAP coverage, but the result is the same. Because the leasing company will cover the “gap” if our car is considered a total loss due to crash or theft. Usually it is in the section titled, “Early Termination Because of Total Loss”.
“You say Toyota does not include GAP insurance. But, I really want to a lease a Toyota – what is the best way to go about this?”
When asked about buying GAP coverage in the F&I office, say something like:
Yes, I looked into this. And my auto insurance company is offering it to me for $6 year.
Watch how fast that $900 GAP coverage crashes in price. I would have the Toyota dealership write the GAP coverage if it comes down in price at $200 (or less).
“Does GAP coverage really cover our regular auto insurance deductible?”
In most cases, yes…
GAP covers the difference between the actual cash value (ACV) of your vehicle and the outstanding loan balance. Since your insurance company pays ACV less the amount of your deductible, the “gap” is increased by this amount. When your loan balance is paid off by GAP the deductible is paid as part of that balance.
But get this. If you have no gap, GAP coverage does not cover our deductible.
When we lease a new car at the absolute lowest price, there is almost never a “gap”. My KTL At-Home Lease System shows you how I do it.