When purchasing a new car, one of the critical decisions you’ll face is how to protect your investment. Beyond traditional auto insurance, two specialised products can provide additional coverage: Gap insurance and New Car Replacement insurance.
Both offer valuable protection but serve different purposes and have distinct benefits. Understanding these differences can help you decide which insurance product is right for you. So, let’s take a look at these differences and find out which type of coverage best suits your needs.
What is Gap insurance?
Gap insurance, or guaranteed asset protection insurance, is designed to cover the “gap” between the amount you owe on your car loan or lease and the vehicle’s actual cash value (ACV) in the event of a total loss.
This situation can arise if your car is stolen or damaged beyond repair in an accident. Cars depreciate rapidly, and standard auto insurance policies typically cover only the ACV, which can be significantly lower than what you owe on your loan or lease, especially in the early years of ownership.
What is New Car Replacement Insurance?
New Car Replacement insurance is a bit more straightforward and the coverage allows you to replace your totalled car with a new model if it is written off within the first few years of owning the car.
Essentially, where Gap insurance pays off your loan balance after the vehicle is written off, new car replacement insurance provides you with a brand new car of the same make and model, or one that is comparable to what you originally purchased.
Key differences
By now, we have discovered that there’s a distinct difference between gap insurance and new car replacement insurance. Gap insurance protects your financial investment from adding up to more than your vehicle’s market value in the event of a total loss.
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On the other hand, new car replacement insurance ensures that you can replace your destroyed vehicle with a new one, taking into account any loss in value. So, you won’t need to downgrade your car as a result of depreciation.
Let’s take a look at more key differences in detail.
Eligibility and timeframe
- Gap insurance: Generally available as long as you have a loan or lease on the vehicle. It’s particularly valuable in the early years when depreciation outpaces loan amortisation.
- New car replacement insurance: Typically limited to newer vehicles, usually those less than two to three years old. Some insurers require that you be the original owner.
Cost and availability
- Gap insurance: Often less expensive than new car replacement insurance and can be purchased from both insurance companies and auto dealerships.
- New car replacement insurance: Usually costs more and is only available through auto insurance companies.
Benefit payout
- Gap insurance: The payout goes directly towards paying off your auto loan or lease, not towards purchasing a new vehicle.
- New car replacement insurance: The payout is explicitly aimed at covering the cost of a new vehicle, similar to the one lost.
Which should you choose?
The next thing to consider now would be the type of insurance to choose from. Gap insurance should be the choice if you’ve managed to finance your car with a small down payment or have a long-term loan because the likelihood of owing more than the vehicle is worth is higher.
Also, look into attaining Gap insurance if you’re leasing your vehicle, as ensuring your car is maintained to a high standard is required for this type of insurance.
Consider new car replacement insurance if you’re able to afford a higher premium and are looking for the reassurance that you can replace your vehicle with a new one in the event that your car is totaled. Choosing this option is also relevant if you’re concerned that you won’t be able to afford a new car equivalent to what your initial purchase price was.
Both gap insurance and new car replacement insurance offer valuable protections in specific scenarios related to new car ownership. Your choice between the two should depend on your financial situation, how you use your car, and your level of risk tolerance.
For more information on the best gap insurance deals, make sure to get in touch with Protect Your Family.