You just bought a brand-new car and couldn’t be happier. But then someone flies through a red light and totals it!

Few things are more upsetting than learning you owe money for a vehicle that was wrecked or stolen through no fault of your own. But that is often the case for those without guaranteed asset protection, or GAP, insurance.

GAP insurance pays the remaining balance on a loan that is more than the actual cash value (ACV) of a vehicle if it suffers a total loss. As more people are choosing to finance their vehicles, and for longer periods, everyone should consider GAP insurance.

A vehicle’s ACV reflects its purchase price minus depreciation, the reduction in value that occurs as a result of age and use. When the depreciated value of a vehicle is less than the amount owed on a loan or lease, the owner is said to be “under water,” or “upside down,” on the financing.

When that happens, standard auto insurance will compensate for the ACV only, even when your vehicle is totaled by another driver who is at fault. As a result, you may no longer have a vehicle but still owe money for it. That’s where GAP insurance comes in.

GAP options

Leased vehicles often require GAP insurance as a standard component of the lease agreement. If you purchase your vehicle, you typically have the option to buy GAP coverage from a dealer or your insurer, or not at all.

GAP coverage is typically added as an endorsement to your auto insurance policy. Your rate will depend on the usual underwriting factors, such as your vehicle's characteristics, your driving record and your geographic location.

GAP insurance from a dealer is often more expensive, and sometimes includes a large upfront payment. But it has certain benefits:

• The coverage is not subject to the auto policy deductible.
• The coverage will not be canceled for as long as you own the vehicle.

If you purchase GAP insurance through a dealer, you can purchase regular auto insurance from your insurer without jeopardizing the GAP coverage. However, it may be more difficult to cancel GAP insurance acquired through a dealer, especially if the coverage was a condition of your loan rate.

Do you need it?

To determine if GAP insurance is right for you, there are three things you need to know:

• The balance you owe on your vehicle financing
• Whether you are willing to pay the balance you owe on the vehicle
• The ACV of the vehicle

GAP insurance is an all-or-nothing proposition. Either you insure the entire gap or none of it; there is no alternative for insuring a percentage of it. However, GAP insurance is often limited to 25% of the vehicle’s ACV.

Actual cash value

Determining the ACV of a vehicle is more complex.

You likely know your vehicle has a “book value” established by national automotive associations. The book value is based on the vehicle's make, model and age, and the number of miles it has been driven. Do not confuse the vehicle's book value with its ACV.

First, different services can provide varying book values for the same vehicle. More importantly, however, a vehicle’s ACV will reflect its history.

Accidents take a toll on your vehicle’s ACV. But even in the absence of collision damage, your geographic location matters. A car parked on the street in a northern state, where it sustains corrosion from road salt, depreciates faster than a car parked in a garage in a state that rarely experiences snow.

When determining your need for GAP insurance, it’s not enough to watch the balance of your lease or loan. You must compare the reduction in the balance to the estimated depreciation of your vehicle. Your need for GAP coverage increases if the estimated depreciation of your vehicle outruns your loan balance.

Always consider GAP insurance when purchasing a new vehicle. It can provide peace of mind and financial relief should the unexpected occur. Speak to your Rathbun Account Manager. They can help you calculate the ACV of your vehicle and answer any questions you may have about GAP insurance.