What is gap insurance?

11 minute read Published on Oct 6, 2023 by BrokerLink Communications

What is gap insurance?

If you have a car insurance policy in Toronto, then you may want to consider adding gap insurance to it. Gap insurance is an optional coverage that has all kinds of benefits, especially if you lease or finance your car. Learn more about how gap insurance works below.

Gap insurance 101

Gap insurance is a type of auto insurance coverage that can be added to policies in Canada. It stands for guaranteed asset protection or guaranteed auto protection. It offers a degree of additional financial protection to those who lease or finance their vehicles, as with gap coverage, your insurer will cover the “gap” between the remaining balance that a borrower has on their car loan and the value of the vehicle if it was lost or totalled.

In other words, if you get into a major accident and your leased or financed car is deemed a write-off but you still have several thousands of dollars outstanding in vehicle loan payments, your insurance company will help you repay this money to your leasing or finance company.

Please note that to be eligible to file a gap insurance claim, the cause of the accident must be covered by your auto insurance coverage. For example, if your leased vehicle was stolen but your policy doesn’t include comprehensive car coverage, then you couldn’t file a gap insurance claim. But if your policy did include comprehensive coverage, you would be eligible to file this type of claim.

Why is gap insurance important?

Gap insurance is incredibly important for those who lease or finance their cars, and the primary reason for this is that cars depreciate quickly in value. Actual cash value coverage, which is the default type of coverage included with car insurance policies in Canada, takes into account depreciation in the event that a car is totalled and deemed a write-off.

As such, the payout you will receive from your insurer is likely to be far less than what you originally paid for the car, and even well below what you might need to buy a new car. Thus, if you didn’t have gap insurance, you would be on the hook for funding a good portion of your new car, along with any outstanding loan payments on the old car. However, by adding gap insurance to your auto policy, your insurance policy would pay for the actual cash value of the vehicle as well as the remaining balance of your car loan. This level of financial security is what makes gap insurance so important.

How long does gap coverage last?

Gap coverage comes with an expiry date, just like any insurance policy. Typically, this expiry date is between 36 months and 48 months of the start date of the lease. Ultimately, your gap insurance term will depend on what is offered by your insurance company. Please note that not everyone will be eligible to add gap coverage to their policy, each company has specific criteria to be eligible for this coverage.

It is also worth noting that some leasing companies or lenders require borrowers to have valid gap insurance coverage for a set period of time. For instance, if your leasing contract stipulates that you must have gap insurance for a period of 48 months, then you will need to find a provider that can offer you this. If you are hesitant to purchase coverage for such a long period of time, you might find it useful to know that if you end up paying your vehicle off early or selling it, you may be able to cancel your gap insurance policy and receive a refund for the remainder of the term.

Who needs gap insurance?

Gap insurance is largely designed for drivers who lease or finance their vehicles. More specifically, it is for those who lease or finance brand-new vehicles and who intend to lease their cars for 60 months or more. It is also well-suited to policyholders who drive a car that depreciates faster than other types of cars. Depending on your situation, you might even be required to purchase gap insurance if the down payment you put on your car was less than 20%. Thus, gap insurance is also for drivers who can only afford to make a small down payment on their car.

What does gap insurance coverage not include?

Gap insurance coverage has its limits. While it offers many benefits to drivers, it will not protect you in every situation. As mentioned previously, gap insurance will not cover you for damage that is caused by risks not listed in your policy.

Using comprehensive coverage as an example, if your car was stolen or damaged in a fire while parked in your driveway, but you don't have comprehensive coverage, then gap insurance wouldn’t help you. Oppositely, if your car was damaged in an accident and your policy contains collision car insurance, then you could file a gap insurance claim.

Further, it is worth noting that gap insurance is designed to cover outstanding loans owed to your leasing or financing company, not other types of fees. Continue reading for a list of the types of damage, as well as the specific kinds of expenses that gap insurance will not cover:

  • Any previous damage, storage, towing, or wear and tear to the vehicle
  • Remaining balances from prior leases or loans
  • Extended warranty costs
  • Lease security deposits
  • Penalties for excessive mileage
  • Late payments
  • Non-OEM parts added to the vehicle, such as stereos or navigation systems

Is gap insurance required in Canada?

Gap insurance is not a legal requirement in Canada. Unlike third party liability car insurance, this type of protection isn’t mandatory, it’s optional. That said, you may be contractually obligated to add it to your policy depending on the terms and conditions of your lease agreement. For instance, some leasing companies stipulate that the borrower must have valid gap insurance coverage at the start of the lease. Financing companies typically do not require gap insurance as often as leasing companies do, but it’s still strongly recommended due to how quickly vehicles depreciate.

Where can I buy gap insurance?

The good news is that buying gap insurance couldn’t be simpler. In fact, you have several options as to where you want to purchase it from. You can usually buy gap insurance directly from a car dealership, from a leasing company, or from an insurance company. Please note that buying car insurance directly from a dealership or lender can be more convenient as sometimes the cost of the coverage can be incorporated into the total of your loan.

As with a regular car insurance policy, when you buy gap insurance, you may have the option of paying for your coverage upfront or bit by bit, paying an agreed-upon amount each month. Whether you decide to purchase gap insurance through a lender, car dealership, or insurance agent, be sure to consult with a licensed insurance professional at BrokerLink beforehand. One of our car insurance advisors can help you decide on the best coverage for your needs. They can also make sure that you don’t overpay for coverage by comparing the cost of gap insurance from different providers in Canada.

How much does gap insurance cost in Canada?

The cost of gap insurance in Canada often varies from driver to driver, or at least between providers. For instance, some car dealerships, leasing companies, and lenders have flat fees for gap insurance. However, these fees will be different depending on the specific company or dealership. Meanwhile, if you decide to purchase gap insurance through an insurance company, your gap insurance rate will be unique to you.

This is due to the fact that insurance companies consider all kinds of factors when setting insurance premiums, such as your driving record, claims history, gender, age, home address, the make and model of the vehicle you drive, and your driving experience, among others. Learn more about how much car insurance costs per month in Ontario by contacting BrokerLink or requesting a free insurance quote.

How can I find out if I have gap insurance?

If you aren’t sure whether your auto insurance policy already contains gap insurance coverage, we recommend reviewing the terms and conditions of your car insurance agreement and/or your lease agreement. If you already have gap insurance coverage, it will be clearly stated in one or both of these contracts.

Can I cancel gap insurance coverage?

It depends. In most cases, if you want to cancel your gap insurance coverage, an insurance company will let you do so. That said, you must ensure that cancelling your coverage does not put you in breach of your leasing or loan contract. If your contract requires you to have valid gap insurance coverage, then cancelling your policy early would mean breaking the contract, and if your lender finds out, they could cancel your loan.

A few of the most common reasons that a driver may wish to cancel their gap insurance policy is if they decide to sell or trade their car before the lease is up, if they are able to pay off their car loan before the end of the lease term, or if they want to switch gap insurance providers. Assuming you are within your rights to cancel gap insurance coverage based on your financing contract. At this time, they can inform you how to proceed, as well as let you know if any termination or cancellation fees apply.

In most cases, you can receive a refund for the unused portion of your policy. If you paid for your gap coverage upfront, the insurance company may issue a refund for the remainder of the term. However, if you had been paying for your coverage monthly, then you may be able to simply stop making payments after all of the termination fees are paid.

If you are owed money and your insurance company agrees to issue a refund, you will likely receive this refund within 30 days of the cancellation. That said, different insurance companies have different processing times so it’s best to ask what duration to expect when it comes to receiving your refund.

Other types of car insurance coverage in Canada

As mentioned above, gap insurance is just one of many types of car insurance coverage that can be added to a policy in Canada. Some types of auto insurance are mandatory while others, such as gap insurance, are optional.

Either way, the main purpose of auto insurance coverage is to offer financial protection against losses and damage due to common car accidents and other risks of the road. Below, we outline some of the most common types of car insurance in Canada, ranging from compulsory coverage like accident benefits to extra protection like accident forgiveness:

Third party liability coverage

Liability car insurance is designed to help pay for the cost of an at-fault collision. If you get into an accident that causes bodily harm or property damage to another, this type of coverage can be claimed and will help pay for everything from legal fees and medical bills to the cost of repairing the other driver’s vehicle.

Accident benefits coverage

Accident benefits is another type of mandatory car insurance coverage and it pertains to collisions that result in bodily injury. This type of coverage can pay for the cost of medical attention if someone is harmed in an accident, whether that be the policyholder, pedestrian, or even a passenger. Accident benefits may also cover lost income and funeral fees up to the policy limit.

Direct compensation coverage

Direct compensation coverage is a type of coverage that is mandatory for Ontario drivers. It will protect you if your car is damaged in a collision. If you file a direct compensation claim with your provider, they might issue a payout to help you cover the cost of repairing your vehicle, so long as you are not found to be liable for the accident.

Uninsured automobile coverage

Uninsured automobile coverage is another type of auto insurance that is often mandatory in Canada. It is designed to protect drivers from the risk of getting into an accident with an uninsured, underinsured, or anonymous driver. For instance, if you are the victim of a hit-and-run accident, you can file an uninsured automobile claim to receive compensation relating to the collision.

Collision coverage

Collision car coverage, like gap insurance, is a type of optional insurance coverage in Canada, although your leasing or financing company may require it. This type of coverage can pay for the cost of repairing a vehicle if it suffers extensive damage in a collision. Collision coverage can be claimed whether your car collided with another vehicle, an animal, or a grounded object on the road.

Comprehensive coverage

Comprehensive car coverage is also optional but you may be obligated to add it to your car insurance policy if you lease or finance your car. This type of coverage is often referred to as parked car coverage because it covers vehicles against damage while parked. The specific risks that comprehensive coverage safeguards against will be clearly outlined in your policy.

Typically, most comprehensive coverage policies in Canada protect against the following perils: theft, vandalism, falling and flying objects, fire, and weather-related incidents, such as wind and hail. If it is determined that your car was lost or damaged due to one of the aforementioned perils, you can file a comprehensive insurance claim to cover the cost of repairing or replacing the vehicle.

Accident forgiveness coverage

Another type of optional car insurance coverage popular among drivers is accident forgiveness. Accident forgiveness is additional coverage that can be added to your car insurance policy as an endorsement, to protect your driving record and to help prevent your insurance premium from increasing if you have an at-fault accident claim. Note: coverage and eligibility varies by province.

Waiver of depreciation

A waiver of depreciation is an endorsement or rider that can be added to auto insurance plans for new vehicles. A waiver of depreciation is the opposite of actual cash value coverage in that, if your car is totalled and deemed a write-off by the insurance company, you would receive a payout equal to the full value of a brand-new vehicle rather than equal to the value of your current vehicle, less depreciation. Thus, a waiver of decoration translates to a much larger insurance payout, especially given how fast cars depreciate in value.

Loss of use coverage

Loss of use coverage is one last type of optional coverage that you may choose to add to your car insurance policy. This type of coverage will come in handy if your car is damaged due to a covered risk and it needs to be repaired. While it is being repaired, loss of use coverage will pay for you to take alternative forms of transportation. Depending on your coverage limit, you could be reimbursed for the cost of hiring a rental car, taking ride shares or taxis, or taking public transportation. Ultimately, loss of use coverage can ease the financial burden of being without your vehicle while it’s in the shop, whether it’s in the shop for a few days, a week, or more.

Get in touch with BrokerLink

As a full-service insurance brokerage, we can also help you find the best possible car insurance policy out there. Your dedicated BrokerLink insurance advisors will ensure that your policy meets all local laws and requirements in your province, in addition to meeting your needs. Here at BrokerLink, finding personalized auto insurance coverage for our customers is our specialty. Get in touch today to learn more about our car insurance services and how we can even help you save money on your next policy.

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