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GAP Insurance in Canada Explained

GAP Insurance in Canada Explained

Gap insurance is an optional add-on coverage that protects car owners when they owe more on their auto loan than their vehicle’s actual cash value. Also known as guaranteed asset protection or loan/lease deficiency insurance, gap insurance pays the difference between what your car insurance settles for in the event of a total loss, and what you still owe on your loan.


Gap insurance is designed to provide financial protection for those who have little or no down payment, long loan terms, high interest rates, or are leasing luxury vehicles. Without gap coverage, you could potentially owe thousands of dollars out-of-pocket if your vehicle is totaled or stolen before you have equity.


In this comprehensive guide, we’ll explain what exactly gap insurance is, who needs it most, what it covers, where to buy it, pros and cons, and help you determine if getting gap insurance makes sense for your situation.

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What is Gap Insurance?

Gap insurance is an optional add-on coverage that protects car owners if their vehicle is deemed a total loss. The term “gap” refers to the gap between what your car insurance will pay out if your car is totaled (the actual cash value or ACV) and what you still owe on your auto loan.

Gap insurance is also known as guaranteed asset protection (GAP) or loan/lease deficiency insurance. It is designed to pay the difference between the ACV and the remaining loan balance to the lienholder (usually the bank or lender). This protects the car owner from having to come up with potentially thousands of dollars out of pocket to pay off the remainder of the loan.

Essentially, gap insurance covers the “gap” left over after your standard auto insurance policy pays out on a total loss claim, but you still owe money on your loan. This prevents the car owner from owing any additional money to the lender if their vehicle is totaled or stolen before the loan is paid off.

 

How Gap Insurance Works

Gap insurance is designed to cover the gap between what your car insurance will pay if your vehicle is totaled or stolen and what you still owe on your auto loan or lease.

Here’s a simple example of how it works:

 

Say you purchase a new car for $30,000 and finance it with a 5-year loan. After 2 years, you get into an accident and your car is totaled. At this point, your car may only be worth $18,000 due to depreciation. Your standard auto insurance policy will pay you the actual cash value of $18,000. However, you still owe $22,000 on your loan. This leaves a $4,000 gap that you would be responsible for paying.

Gap insurance kicks in to cover this $4,000 difference so you don’t end up owing any money out of pocket. The gap insurer pays the lender the remaining $4,000 loan balance directly.

This protection is activated if your vehicle is declared a total loss from an accident, natural disaster, theft or other type of loss defined in the policy. Essentially, gap insurance protects you if your car is totaled or stolen and you owe more than it’s worth.

 

Who Needs Gap Insurance?

Gap insurance can provide important financial protection for certain drivers in Canada. Those who are most likely to benefit from gap insurance include:

 

Those with Little or No Down Payment

If you make little or no down payment on a new vehicle, you are immediately starting your loan with negative equity. This means you owe more than the car is worth from the moment you drive it off the lot. Gap insurance protects you if the vehicle is totaled or stolen before you build equity.

 

Those with Long Financing Terms

Loans with longer terms like 60 months or 72 months mean the loan balance will remain higher than the vehicle’s value for a longer period of time. This leaves you exposed to potentially owing thousands if the vehicle is totaled. Gap insurance provides protection for those with 5 years or longer loan terms.

 

Those Who Got a Used Car Loan with High Interest Rates

Used car loans often come with higher interest rates, especially for those with poor credit. The high interest rate keeps the loan balance elevated compared to the depreciating vehicle value. Gap insurance can cover the difference if the used car is totaled or stolen.

 

What Gap Insurance Covers

Gap insurance covers the difference between two important dollar amounts – the actual cash value (ACV) of your vehicle and the remaining balance left on your car loan or lease after an insurance claim payout. Here’s a breakdown:

Actual Cash Value: This is what your car insurance company determines your vehicle was worth at the time it was totaled or stolen. They calculate this number based on the car’s age, make, model and condition. This is the maximum amount your insurance company will pay out on a claim.

Remaining Loan Balance: This is the amount you still owed on your car loan or lease when it was totaled or stolen. For newer cars especially, this number is often thousands more than the car’s depreciated ACV.

Gap insurance covers the “gap” between those two dollar amounts. So if your car’s ACV was $15,000 but you still owed $18,000 on your loan, gap insurance would cut you a check for $3,000 to cover the difference. This prevents you from having to pay anything out of pocket.

In addition to the gap between ACV and remaining loan balance, gap insurance may also cover your auto insurance deductible if you file a total loss claim. So you may get the deductible amount back as well.

 

What Gap Insurance Does Not Cover

While gap insurance provides important financial protection, there are some things it does not cover. Here are some key limitations to be aware of:

 

Extended Warranties

Gap insurance only covers the difference between the actual cash value of your vehicle and the remaining loan balance. It does not apply to any extended warranties or service contracts you may have purchased for the vehicle.

 

Modifications

Any aftermarket parts, custom upgrades or modifications done to your vehicle will not be covered by gap insurance. It only covers the base model vehicle.

 

Equity

Once you have paid down your loan enough to have equity in your vehicle, gap insurance no longer provides a benefit. If your vehicle is totaled, your standard auto insurance would pay out more than what you owe at that point. So gap insurance is most useful early on in a loan term when there is little to no equity.

 

Average Cost of Gap Insurance in Canada

Gap insurance is relatively inexpensive, especially considering the protection it provides. In Canada, the total cost for gap insurance is typically in the range of $600-800 for 3-5 years of coverage. This works out to around $10-30 added to your monthly car insurance premium when you opt for gap insurance.

The cost can vary based on your car’s value, loan amount, insurance provider and other factors. But most drivers find gap insurance to be very reasonably priced for the vital financial protection it offers against owing thousands out-of-pocket after an incident. Given gap insurance only costs a few hundred dollars for the duration of your loan, it can be well worth it for certain drivers.

When calculating the monthly cost of gap insurance in Canada, expect to pay approximately $10-30 extra per month when you add gap coverage onto your existing policy. While the total gap insurance cost may be $600-800, this is spread out over the course of your 3-5 year loan. Going with gap insurance certainly won’t break the bank.

 

Where to Buy Gap Insurance

There are two main options for where to purchase gap insurance coverage in Canada – through your auto insurance provider or directly from the auto dealer when financing or leasing a new vehicle.

 

From Your Auto Insurance Provider

Most major insurance providers in Canada offer gap insurance as an add-on coverage to your existing auto policy. This allows you to bundle gap insurance from the same company that provides your collision and comprehensive coverage. Gap insurance obtained through your insurance company will cover you regardless of what vehicle you are driving, as long as it is a registered vehicle on your policy.

Some of the benefits of getting gap insurance through your auto insurer include:

 

  • Convenience of having all coverages through one provider
  • Can switch gap coverage between vehicles on your policy
  • Competitive pricing when bundled with other policies
  • Can be canceled anytime if no longer needed

 

Check with your insurance agent or broker to get a gap insurance quote added to your policy.

 

From the Auto Dealer

The other option is to purchase gap insurance directly from the auto dealer when you purchase or lease a new vehicle. This coverage is specific to the vehicle you are financing/leasing.

Benefits of getting gap coverage this way include:

 

  • Built into your monthly car payments for convenience
  • Covers entire loan/lease period with no gaps in coverage
  • Transferable to subsequent owner if you sell the vehicle

 

The downside is that dealer gap insurance can be more expensive in the long run. Be sure to compare quotes from both the dealer and your insurance provider.

 

Pros of Gap Insurance

There are a few key advantages to getting gap insurance for your vehicle:

 

Covers Potentially Thousands Owed

One of the main benefits of gap insurance is that it can protect you from owing thousands of dollars if your vehicle is totaled. For example, let’s say you purchase a new car for $30,000 and finance it over 6 years. After two years, your car is totaled in an accident. Your insurance company determines the actual cash value of your now 2-year old car is only $18,000. But you still owe $22,000 on your loan. Gap insurance would cover the $4,000 difference between what your car insurance paid out and what you still owe on the loan.

Without gap insurance, you’d be stuck paying that $4,000 out of pocket. For many drivers, coming up with thousands of dollars like that would be very difficult. Gap insurance protects you from this worst-case scenario.

 

Relatively Inexpensive

Compared to many other add-on coverages, gap insurance is relatively affordable. On average, gap insurance costs between $600-$800 in total for 3-5 years of coverage. That breaks down to an extra $10-$30 per month when added to your existing auto insurance policy.

Considering gap insurance can potentially save you thousands of dollars if your vehicle is totaled, those small monthly premiums are usually worth it for certain drivers. The peace of mind gap insurance provides makes the minor increase in insurance costs worthwhile.

 

Cons of Gap Insurance

While gap insurance can provide important financial protection, there are some downsides to consider as well:

 

Limited Coverage

Gap insurance only covers the difference between the actual cash value of your vehicle and the remaining loan balance. It does not cover extended warranties, insurance deductibles, late fees or modifications made to your vehicle. If you have added any of these expenses into your auto loan, gap insurance will not pay for those amounts.

Gap insurance also only applies in cases of a total loss from an accident, theft, or other type of covered claim. It does not pay out for minor fender benders or repairs – only when your vehicle is completely totaled or stolen.

 

Not Useful Once You Have Equity

Gap insurance is most beneficial when you owe more on your loan than your car is worth. As you pay down your loan over time and build equity in your vehicle, gap coverage becomes less necessary.

For example, if you’ve had your car for 3 years and owe just $5,000 left on your loan, but your car is worth $8,000 in its current condition, then gap insurance would not pay anything. You already have positive equity in your vehicle.

Once you are no longer “upside down” on your loan, gap insurance no longer provides financial protection. So it’s not useful for the full duration of most standard auto loans of 4-6 years.

 

Cases When Gap Insurance Makes Sense

Gap insurance can provide important financial protection for certain drivers and situations. Here are some examples of when getting gap insurance likely makes the most sense:

 

Little or No Down Payment

If you make little or no down payment on a new vehicle, you will start out with negative equity from day one. This means you owe more than the car is worth. Gap insurance protects you if the vehicle gets totaled shortly after purchase.

 

Long Loan Term

The longer your auto loan term, the slower you build equity and the higher the chance you could owe more than the vehicle’s value if totaled. Loans of 5 years or longer are good cases for gap insurance.

 

Used Car with High Interest Rate

Used car loans often come with higher interest rates. This means your loan balance decreases slower over time. Gap insurance gives protection if your used car with a high rate loan gets totaled.

 

Leased Luxury Vehicle

Leased vehicles, especially luxury models, tend to depreciate quickly. The residual value may end up higher than the car’s worth. Gap insurance prevents owing money at the end of your lease term if the car gets totaled.

 

Cases When Gap Insurance May Not Be Needed

While gap insurance can provide important financial protection, there are some cases when it may not make sense for your situation. Here are a few examples of when gap insurance may not be necessary:

 

You Made a Large Down Payment

If you put 20% or more as a down payment on your vehicle, you likely have instant equity in your car. The down payment brings down the amount you owe to the lender, so there’s less of a gap between that amount and the car’s value. With a large down payment, your regular auto insurance would likely cover the remaining loan balance if the car was totaled.

 

You Have a Short Loan Term

Loans of 3 years or less have less of a gap between the value and remaining balance. Shorter loans mean you pay down the principal more quickly, so you owe less over time. For very short 1-2 year loans, you may not need gap insurance at all.

 

You Have an Older Used Car

On an older used car with high mileage that you purchased outright, gap insurance likely does not apply. Older cars depreciate more slowly and are often worth less than what you paid initially. With liability only coverage, gap insurance won’t provide much benefit.

 

You Plan to Pay Off Your Loan Early

If you take an extended loan term but plan to pay it off much sooner, say in half the time, gap insurance may not be necessary. Paying down the principal faster gives you equity sooner, reducing the potential gap between loan and value.

 

Alternatives to Gap Insurance

While gap insurance is designed specifically to cover the difference between what you owe on your car loan and what your insurance pays if it’s totaled, there are some other options that can provide financial protection in certain cases:

 

Extended Warranties

Extended warranties cover repairs and some replacement costs after the manufacturer’s warranty expires. They can help pay for major mechanical breakdowns and repairs. However, extended warranties do not cover collision damage, theft, or total loss – so they are not a direct alternative for gap insurance.

 

Umbrella Insurance

Umbrella insurance provides additional liability coverage above and beyond what your auto and home insurance provide. It can cover expenses if you are sued for property damage or injuries caused in an at-fault accident. But umbrella insurance does not cover your vehicle damages or remaining loan balance. So it does not replace gap insurance.

While alternatives like extended warranties and umbrella insurance can provide valuable protections, they do not directly replace gap insurance. For covering the remaining loan balance specifically, gap insurance is the most targeted solution.

 

How to Determine if You Need Gap Insurance

Deciding if gap insurance is right for you often comes down to evaluating three key factors of your auto loan or lease:

 

Down Payment Amount

The size of your down payment can significantly impact whether you should get gap coverage. If you put less than 20% down on your vehicle, you are more likely to owe more than it’s worth, especially in the first few years of ownership. With little or no money down, gap insurance can provide vital protection.

On the other hand, if you made a substantial down payment, you may have enough equity in the vehicle that gap insurance is unnecessary. Use a auto loan calculator to estimate your loan-to-value ratio.

 

Loan Length

Longer loan terms of 5-6 years or more mean you are at greater risk of owing more than the vehicle is worth if it gets totaled. This is because vehicles depreciate rapidly in the first few years. With a longer loan, gap insurance can pay off the remaining balance.

Shorter loans of 3-4 years have less risk of being upside down, so gap may not be as useful. Run some calculations to see if you are likely to have positive equity before the loan ends.

 

Interest Rate

Higher interest loans mean you pay more in financing charges over the life of the loan. This increases the gap between the value and loan balance. If you have a high interest used car loan, gap insurance can provide financial security.

Lower interest loans from 0-3% mean you pay less in interest and are less likely to owe more than it’s worth if totaled. Carefully consider if gap coverage is necessary.

Crunching the numbers on your down payment, loan length and interest rate can help determine if gap insurance is a smart choice for your situation.

 

Conclusion

Gap insurance can provide important financial protection for some drivers in Canada, but it’s not right for everyone. When deciding if gap insurance makes sense for your situation, carefully evaluate your down payment amount, loan length, interest rate and other factors.

In summary, gap insurance covers the gap between what your vehicle insurance pays out if your car is totaled or stolen, and what you still owe on your auto loan or lease. It protects you from having to pay potentially thousands of dollars out of pocket in the event of a total loss.

However, once you have built up enough equity in your vehicle to cover the difference, gap insurance is no longer needed. And for buyers who made a large down payment upfront or chose a shorter loan term, the benefit of gap insurance may be limited.

Carefully weighing the pros and cons based on your specific auto loan or lease details can help determine if gap insurance is a smart financial safeguard or an unnecessary expense.

 

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Questions About GAP Insurance

Gap insurance in Canada is an optional add-on coverage for your auto insurance policy. It helps pay the difference between what your car insurance pays if your vehicle is written off, and what you still owe on your car loan or lease. Gap insurance protects you from having continuing loan payments after your vehicle is gone.



You may want to consider gap insurance if you made a low down payment, financed your car for a long term, leased your vehicle, or drive a car that depreciates quickly. In these cases you are more likely to owe more than the car is worth when it gets written off. Gap insurance protects you financially in this situation.

Gap insurance tends to make the most financial sense if you made a down payment of less than 20%, financed your car for longer than 5 years, leased your vehicle, or are driving a vehicle that depreciates quickly in value such as a luxury or performance car. In these cases you are more likely to owe more than the car’s value over time.



Gap insurance costs between $300-$800 on average in Canada. The cost can vary depending on your auto insurance provider, where you live, the value of your vehicle, the length of your loan term, and other individual factors. Shop around to find the best rate.

Most experts recommend getting gap insurance directly from your auto insurance provider rather than the car dealership. Auto insurers tend to offer lower rates and better policy options. Just make sure gap coverage is included on your auto policy, not as a separate contract.



Gap insurance in Canada covers the difference between what your car insurance pays if your vehicle is written off (actual cash value), and what you still owe on your auto loan or lease (outstanding balance). This protects you from having continuing loan payments with no vehicle.

Some, but not all, gap insurance policies in Canada will cover your auto insurance deductible if you file a total loss claim. This is an added benefit on certain gap insurance plans. Check with your provider to see if deductible coverage is included.

No, in order to qualify for gap insurance in Canada your auto policy must include collision and comprehensive coverage. That counts as full coverage. Gap insurance only pays out when you file a total loss claim, which requires these coverages.

Experts typically recommend gap insurance for as long as you have car loan payments. Once your auto loan balance matches or drops below your car’s depreciating value, you likely no longer need the coverage. For most drivers that is 3-5 years.

Gap insurance coverage will stop covering your outstanding auto loan balance as soon as your car’s value matches or exceeds your remaining loan balance. For most drivers this happens within the first 3-5 years of financing their vehicle purchase.



Yes, most gap insurance plans in Canada can be cancelled part way through your policy term. You will receive a prorated refund for the unused portion of your gap insurance premium. Cancellation fees may apply so check your exact policy.

Yes, even if you pay off your auto loan early, your existing gap insurance coverage will remain active until the end of the policy term. This protects you if you purchased or leased another vehicle and needed gap insurance again.

Gap insurance is tied to a specific vehicle identified on your auto policy, and cannot be transferred in Canada. You would need to cancel your existing gap coverage and purchase a new policy for your new vehicle. Most insurers will prorate your refund or premium.



No, gap insurance must be connected to a specific vehicle identified on your auto policy. If you sell or trade in that vehicle, your gap coverage will need to be cancelled. The unused portion of your premium will be refunded to you prorated.



Yes, gap insurance can absolutely be used to cover the difference between the value of your leased vehicle and the early termination charges if it gets written off. Make sure to notify your leasing company that you have gap coverage too.

Gap insurance is highly recommended when leasing vehicles in Canada. Leased cars carry early termination penalties if written off, and you do not own the vehicle to benefit from any appreciation in value over time. Gap insurance protects against these risks.

Yes, you can still qualify for gap insurance on a $0 down leased vehicle in Canada. In fact gap insurance is highly recommended with little or no down payment, since you start owing more than the car is worth as soon as you drive it off the lot.



If you total your leased vehicle in Canada without gap insurance, you will need to pay the early termination charges and fees out of pocket. This is typically thousands of dollars. Gap insurance would have covered the difference between your car’s value and lease penalties.



The most affordable gap insurance plans in Canada tend to come from your existing auto insurance provider when added to the same policy. Large national insurers like Belair, TD Insurance, Intact, and Desjardins often offer very competitive gap insurance rates.

The best way to get quotes for gap insurance rates in Canada is to contact your current auto insurance provider directly, and ask them to add on a quote. You can also use an online insurance quotes comparison tool to quickly see rates from multiple national providers. Comparing rates is wise.

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