Imagine this car accident scenario: your newly bought or leased vehicle is stolen or totaled. Worse still, you owe more on the car than its value. If you have guaranteed asset protection (GAP) insurance or new car replacement insurance, you can wake up from this bad dream and relax.
With GAP insurance, your insurance provider will cover the difference between what you owe on the loan or lease and the car's value in the claim settlement. New car replacement coverage will pay out the price of a brand-new car of the same make and model, minus your deductible.
Both types of insurance can help new car owners and people who lease cars from owing thousands of dollars on a totaled or stolen car.
We’ll explain the important differences between new car replacement insurance and the best GAP insurance. We’ll also provide information to help you compare GAP insurance prices.
What is GAP insurance?
A car loses value when it’s driven off the lot. Your new car will lose 10% of its value within the first few months. If your car gets wrecked or stolen, you might owe more on the car than it’s worth.
GAP insurance pays for the “gap” in coverage if your car is stolen or totaled and the debt you owe on the vehicle exceeds the car’s value. It’s not part of your standard general liability policy. It’s an add-on type of coverage, which means it costs extra.
It’s important to note that GAP insurance does have some restrictions. Your insurance company deducts from your total payout amount if you have overdue payments, financial penalties such as excessive use of the vehicle, or carryover balances.
How does GAP insurance work?
GAP insurance must be used with other add-on policies such as collision and comprehensive coverage. It works with your collision policy for car accidents or your comprehensive auto theft policy.
Under either your comprehensive or collision policy, the insurance company will determine how much you collect after your car is stolen or totaled. Typically, that amount is calculated by taking the vehicle's value at the time of the accident or theft minus any deductible.
There are cases where the insurance company’s value of the stolen or totaled car is less than what the person owes the lender for the vehicle. If you owe more on the car’s loan or lease than the claim amount offered by the insurance company, GAP insurance pays the difference between the debt and the car’s claim settlement value.
Car lenders and leasing companies often require GAP insurance for leased vehicles. GAP insurance assures financing companies that borrowers won’t bail on a car loan or lease for a stolen or wrecked vehicle.
If you’re leasing a vehicle, the dealership may offer GAP insurance. However, this isn’t your only option in purchasing this coverage. Most insurance companies also offer GAP insurance — typically cheaper than the dealership.
What is new car replacement insurance?
New car replacement insurance covers any shortfall between your car’s depreciated value when it was totaled and the amount you still owe. In other words, new car replacement coverage pays for a brand-new vehicle of the same make and model, minus your deductible.
There are several conditions of new car replacement insurance. Like GAP insurance, you must use it with your existing collision and comprehensive car insurance.
Typically, you have to purchase new car replacement coverage within a few months of purchase. Also, it’s common for a new car replacement policy to be limited to cars that are totaled or stolen within a year of purchase or driven less than 15,000 miles.
Other limitations include that only the first car titleholder can make a claim under a new car replacement policy. It’s also important to note that new car replacement insurance may not be combined with GAP insurance.
An important thing to remember is that you will have to pay a deductible with new car replacement insurance. A deductible is the amount you pay out of pocket before your insurance company will pay the covered loss. You only get the full new car price minus your insurance deductible.
For example, if your new car replacement claim is valued at $25,000, but you have a $1,000 deductible, your insurance company will require that you pay $1,000, and then it will release a check for $24,000.
But what if your totaled or stolen car is last year’s model? There are insurance policies, called better or newer car replacement insurance, that will pay a replacement value for the latest model of your car.
These policies promise to pay the replacement value for a newer model of your car, but they will have limits on how many years the coverage will last. Typically, you must have owned your vehicle for less than two years to get a payout equal to the newest model year.
New car replacement also does not cover additional alterations made to your vehicle, either by yourself or the dealership. They will only go by the market value of your replacement car.
Any aftermarket parts, such as wheels or electronics, will not be included in your car’s total value. If you have added these items to your vehicle and have new car replacement coverage, their value will essentially be nonexistent to your insurance company.
Do I get a new car with GAP insurance or new car replacement insurance?
You don’t automatically get a new car with either GAP insurance or new car replacement coverage. Whether you get a new car will depend on whether you can afford one based on what your lender says.
The two main factors determining whether the claim settlement will be enough to buy a new car are the total loss value calculated by your insurer and the amount owed on the vehicle.
Calculating the total loss value of your totaled car varies from provider to provider. Although each insurance company can use its specific formula, state laws regulate how insurance companies determine the total loss value.
Will I get the claim settlement check directly from my car insurance company?
More often than not, new cars are purchased through financing. Leased cars always require financing. The insurance company will issue a settlement check payable to the financial lender and car owner in those cases.
The lender, in turn, will require the person who owns or leases the car to sign over the check first to pay off the remaining financing, including any contract fees and costs. Once the debt is paid off in full, the lender will cut a check to the owner for the remaining amount.
Do I need GAP insurance or a new car replacement?
If you are looking into these coverage options, consider combining the two. However, GAP insurance and new car replacement cannot be combined on your insurance policy, meaning you must choose one or the other.
While neither option is relatively expensive, there are some significant differences between the two. The choice you make will ultimately depend on your needs and preferences.
Suppose you prefer a payout for the difference between what you owe on your new vehicle. However, if you prefer to replace your new car with an equal or even better model, choosing a new car replacement coverage is your best option.
Talk to your insurance agent to help you determine which type of coverage might work best for you.
Lauren Blair is a lawyer who writes for the insurance comparison site, ExpertInsuranceReviews.com. She has over 25 years of experience in litigation.
