Gap Insurance: What Is It and Do I Need It?

3 minutes
Gap Insurance: What Is It and Do I Need It

Vehicle replacement coverage or guaranteed auto protection (GAP) is an often-overlooked insurance option. Unfortunately, many people don’t understand what it is and how it’s used, so they can’t take advantage of it.

What is gap insurance, and why is it important? Read on to learn more.

What Is Gap Insurance or Vehicle Replacement Coverage?

Vehicle replacement coverage or gap insurance is an extra coverage option that protects your vehicle if it’s stolen or totalled in an accident.

Gap insurance in Ontario and other places in Canada is typically offered by dealerships and insurers when you buy a new car. If you don’t take their offer, you may miss your chance to get gap insurance. You must also have basic car insurance coverage to qualify for gap insurance coverage.

How Much Does Gap Insurance Cost?

Gap insurance costs vary depending on the car and insurer, but it generally costs 5% of your collision and comprehensive insurance coverage. Your insurer will roll gap insurance payments into your monthly vehicle installments if you get it from the car dealership.

How Gap Insurance Works

Gap insurance protects you from making payments on a car that’s been totalled or stolen. If that happens, the insurer will provide you with the car’s cash value plus any remaining car payments, freeing you from paying installments on a non-functional or lost car.

Here’s an example to show you how it works:

You have a $15,000 car. After getting in an accident, insurers determine your car is currently worth $12,000 and covers you for that amount. This means you still owe your car financing company $3,000. Fortunately, you have gap insurance, which covers the $3,000 – meaning you don’t have to pay for the remaining car loan out of pocket.

What’s Not Included in Gap Insurance

Gap insurance doesn’t cover everything on your car when a total loss happens. There are some notable exclusions, such as:

  • Additional car modifications not installed by the factory
  • Extended warranties
  • Lease expenses
Gap Insurance: What Is It and Do I Need It

Why You Need Gap Insurance in Canada

While car insurance is mandatory for all Canadian drivers, the coverage is somewhat limited and won’t protect you from total vehicle loss. Here are a couple of reasons why you should get gap insurance:

  • Get peace of mind if your car is a total write-off after an accident or theft
  • Reduce your financial risk if your car loan is larger than your insurance coverage

Things to Consider Before Buying Gap Insurance

Before purchasing gap insurance, you should ensure it’s worth getting. Consider these factors before talking to your insurer or dealership about gap insurance:

  • Car depreciation rate: If you buy luxury cars or vehicles that depreciate quickly, there’s bound to be a large gap between your actual vehicle value and loan value. In these cases, gap insurance is generally a good idea.
  • Car loan terms: With longer vehicle loan terms, it takes longer to reduce your total loan balance, creating a wider gap between your car value and loan amount. People with long vehicle loan terms benefit more from gap insurance.
Gap Insurance: What Is It and Do I Need It

Closing Thoughts

While often overlooked, gap insurance is important because it provides extra protection if your car is a total write-off. Instead of making payments on a car that you can’t drive, you can use the cash you saved to work towards buying a new car to replace the old one.