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Car Dealers Sell GAP Insurance to Fill Gap Between How Much You Owe and What The Car is Actualy Worth

NEW YORK December 14, 2003; The AP reported that car dealers are selling insurance to fill the gap between the value of your car and how much you owe.

Once almost exclusively used in lease contracts, GAP insurance is creeping into more traditional car loans. GAP -- which stands for guaranteed auto protection -- promises to pay the difference between your vehicle's value and your loan balance if your car is totaled or stolen.

The policies help address a dilemma that car buyers are increasingly finding themselves in, dealers and insurance executives said. Thanks to generous incentives, no-money-down deals and long-term loans, more consumers are finding themselves "upside down" -- industry parlance for owing more than the vehicle is worth -- for a longer period. That means that if their car is stolen or totaled in an accident, they may actually have to write a check to the bank.

"There's a yawning gap that's developing between the actual cash value of the car and what you still owe on it," said Bob Hartwig, economist at the Insurance Information Institute.

Needing GAP insurance can mean you might be stretching to own more car than your finances can handle. Or, you may have been tempted to take on a longer-term loan to reduce your monthly payments -- a strategy that has its downside since you'll be carrying the payments as the car's value dwindles.

Sales of these policies are growing and becoming an increasingly important profit center for dealerships and specialty insurers.

For example, City Toyota of Daly City, Calif., sells the GAP policies for between $395 and $495 which would be added to the cost of a car, according to owner Jim Wardy.

Allstate Corp. entered the business when it acquired American Heritage Life Insurance Co. and its First Colonial Insurance Co. division in 1999. At First Colonial, which starting underwriting GAP policies for dealerships about three years ago, sales now make up more than 60 percent of its business, up from less than 5 percent two years ago, said president Tony Wanderon.

The financing and insurance arms of General Motors Corp., Ford Motor Co. and DaimlerChrysler AG offer GAP policies through their dealers, typically capped at about $500. Sales of GAP policies offered through GMAC Insurance, for example, have been doubling each year and are currently on an annual pace to exceed 60,000 contracts a year.

"The product itself is probably the second most popular purchased product behind extended service contracts over the last two years," said Dean Grant, divisional manager at American Financial & Automotive Services Inc., a League City, Texas, seller of GAP insurance to dealerships and banks. Dealers typically sell its GAP policies on about 37 percent of the contracts they finance, an increase of almost 30 percent over the last two years, he said. Payouts have also increased: The average GAP claim is about $2,200, up from $1,900 two years ago.

For the buyer, prices of GAP policies can vary widely, depending on state regulations, the vehicle type and loan amount. Many dealerships sell the policies for about $500, but you may also be able to find better deals at your local credit union or insurance carrier.

If you own a car with coveted vehicle parts or are a reckless driver, then GAP policies could make sense for you -- especially if you frequently trade in your vehicle and tend to roll over existing loan balances into new loans, experts said.

But the policies aren't for everyone. It's important to think through the probability that you'll need the coverage. Keep in mind that these policies typically pay out only if your vehicle is totaled, not just damaged.

You probably won't need GAP if you put down a large enough down payment. "If you put down 20 percent on a car, you're going to be ahead of the depreciation curve," said Jeff Ostroff, chief executive of of Fort Lauderdale, Fla.