Gap Insurance in Canada: Do You Need It?
Although there are a handful of ways that you can reduce the cost, at the end of the day, there's no denying that buying a new car is expensive. Additionally, vehicle prices are at an all-time high, making it harder than ever for younger drivers to purchase their first ride.
After saving for months or years for a vehicle, very few things are more heartbreaking than finding out that your car has been totalled or stolen. What's more, if you don't have the proper auto insurance, you may have to pay for a portion of the related expenses out of pocket (talk about adding salt to the wound).
But, what if we told you that there's a way that you can avoid paying for these expenses out of pocket? If you want peace of mind on and off the road, we suggest that you take a moment to learn about gap insurance Canada. Doing this could save you thousands of dollars if you happen to total your vehicle in the future.
What is gap insurance coverage and how does it work in Canada?
Car gap insurance (also commonly referred to as guaranteed auto protection) is an auto insurance add-on that covers loan-related payments after a car is stolen or totalled.
START A QUOTEIn Canada, gap coverage is available through car dealerships, financing companies, and auto insurance providers.
Additionally, most companies only offer this type of coverage once, so you should know if you want gap insurance before committing to a purchase. If you decide to purchase this type of insurance, the dealership will add the cost to your loan, so you won't need to make any additional payments upfront.
How does gap insurance work in Canada?
You're likely wondering how gap protection insurance works. After doing some research, you'll come to realize that it's relatively simple.
As mentioned above, gap insurance covers loan-related costs after a vehicle is stolen or totalled in a collision. After this happens, you're required to file a claim with your car insurance provider. Your car insurance provider will cover the actual cash value of your vehicle, but if you haven't paid off your loan, you're responsible for covering the remainder. If you have gap insurance, the insurer will cover the rest of the loan, which means that you don't have to deal with any additional financial burden.
On the other hand, if you don't have gap insurance, you'll be required to cover the remainder of the loan out of pocket. This can range from hundreds to thousands of dollars (depending on the size of your loan).
Example
Are you having trouble understanding? Here's an example:
You recently purchased a new vehicle for $40,000. You've stayed on top of your payments, but you still owe about $32,000. If your car gets stolen or destroyed in a collision (and you're not at fault), you can expect to receive the vehicle's actual cash value (for the sake of simplicity, let's say $30,000).
However, as we established earlier, you owe $32,000 — this means that you'd have to pay $2,000 after getting into an accident. Thankfully, if you have gap insurance, your insurer will cover the $2,000.
Factors to consider before committing to gap insurance
Although gap insurance is exceptionally beneficial for a wide range of drivers in Canada, there are a handful of things that you should be aware of before signing on the dotted line:
The depreciation rate of your vehicle
As you likely know, vehicles depreciate at an extremely high rate. If you finance or purchase a car with an exceptionally high depreciation rate (like a luxury model), you can potentially create a negative gap between your loan and vehicle value. If you owe more than your vehicle is worth, gap insurance is a wise choice.
Length of loan terms
The length of your loan plays a significant part in determining whether gap insurance is the right choice.
For instance, if you happen to have a long-term loan (for example, 60 months), your loan will be spread out for a lengthy period. This gives you fewer opportunities to chip away at the loan. If over time, the remainder of your loan exceeds the actual cash value of your vehicle, you'll be glad that you invested in gap coverage.
In contrast, if you have a short-term loan, you may find that gap insurance doesn't make financial sense in the long run.
Are there exclusions?
Yes, there are a handful of details that insurers exclude from most gap insurance policies. Some examples include:
Modifications
Your gap coverage policy doesn't include or cover the cost of additional modifications made afterwards. This includes changes like:
- Stereo systems and speakers
- Aesthetic upgrades (tints, rims, etc.)
- Unnecessary part replacements or upgrades
This is something to keep in mind if you're the type of driver who likes to customize your ride.
Warranties
Your gap insurance doesn't cover warranties, unaddressed payments (unpaid, overdue, etc.) or similar fines.
Lease-related payments
Your gap coverage doesn't cover any lease-related payments that you've made.
Bonus — Basic coverage
Although this isn't an exclusion, we felt that it was necessary to mention that drivers need to have basic car coverage in order to be eligible for gap coverage.
If you're struggling to find affordable car insurance, it may be time to reach out to an insurance advisor online. An experienced insurance advisor can provide you with several quotes in a few minutes — either by phone or over the web. Before you know it, you'll have cheap, personalized auto insurance that you can rely on.
Getting gap insurance for a used vehicle
Generally, we wouldn't recommend purchasing gap insurance for a used vehicle. This is due to the fact that used vehicles don't depreciate as swiftly as new models. Because of this, it's unlikely that your loan will exceed the vehicle's actual cash value.
One of the few times you may want to consider getting gap auto coverage on a used vehicle is if you want a long-term loan on a slightly-used luxury model with a high depreciation rate. However, we suggest crunching some numbers before rushing into a big decision.
