What Is GAP Insurance and Do You Need It for Your Car?

GAP insurance vs Ontario’s OPCF 43 and Alberta’s SEF 43

Buying a new vehicle is expensive. Even the cheapest new car will run you several thousand dollars a few times over. There are maybe - maybe - a handful of vehicles that cost less than $15,000 new. And because new vehicles are so expensive, most Canadians finance their new purchase. After all, who has $40,000 lying around in their bank account? That is how much Canadians are spending on average for their new set of wheels, CTVNews reports.

With vehicle prices being what they are, many drivers look to protect their investment (not that you should call a vehicle an investment) with insurance. What type of insurance will depend on who you talk to and the reason for it.

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Let’s start first with the type of coverage you could get from your auto insurance provider.

Depreciation? What depreciation?

In both Ontario and Alberta, you can purchase an optional endorsement (also called a rider) for inclusion on your policy that maintains the value of your vehicle – new – should the car’s value come into question. Common scenarios when your vehicle’s value comes into play include if your car is a write-off from a collision or stolen and never recovered. It’s called a Waiver of Depreciation, and in Ontario, it’s referred to as OPCF 43. In Alberta, it’s SEF 43.

This endorsement removes the insurer’s right to deduct depreciation should there be a need for an insurance claim. However, this endorsement is only available for a limited time, usually 24 to 36 months after the vehicle’s purchase date.

This type of endorsement is often a good idea for new car buyers, given the reality of depreciation on a new vehicle. A reality that may surprise you. The Financial Consumer Agency of Canada (FCAC) estimates that a new car loses 25% of its value after the first year and then 15-25% each year that follows.

How does GAP insurance differ?

GAP insurance stands for guaranteed auto protection (or guaranteed asset protection, depending on the source), and it is significantly different from what you’d purchase from your auto insurer. It is optional insurance coverage purchased through the dealership where you buy the car or the financing company you use to secure your loan or lease. It is not an option, feature, or benefit of your auto insurance policy.

The purpose of this insurance is to financially protect car owners who have leased or financed their vehicle until they are no longer in a negative equity situation. FCAC defines negative equity as when your car is worth less than the amount you owe on it.

GAP insurance does not cover all situations where negative equity on your car may leave you open to financial risk. It will offer financial protection if your vehicle is a total loss when you don’t have a Waiver of Depreciation on your auto insurance policy (or are no longer eligible for it) and your car is irreparable.

FCAC provides the following explanation:

If you get into an accident and your car can’t be repaired, the money you get from the insurance company may not cover what you still owe on your car loan. For example, if your insurance company decides the replacement value of your car is $10,000 but you still owe $16,000 on your loan, you will need to cover the $6,000.

GAP insurance isn’t for everyone. The only way to know for sure is to crunch the numbers to figure out when you’ll break even – when you no longer owe more than the car is worth. To do this you’ll need to know things like:

  • The cost of the coverage offered (this will vary)
  • The total cost of the vehicle
  • The interest you’ll be paying over the course of the term
  • The length of the term for the financing
  • How much down payment you’ll be contributing upfront
  • How much that particular vehicle depreciates each year

Once you’ve got this information in hand, you can then decide how much financial risk you’re willing to take on if any, and whether the premium you’re charged is worth it.