While gap insurance isn’t required to be a part of your insurance
policy, this type of add-on coverage can financially protect you from
a total loss. If you owe more on your loan than your car’s current
market value, you are considered “underwater” or “upside-down” on your
loan. In order to avoid making payments on damages that exceed the
value of your car, it may be worth it to consider adding gap insurance
to your policy.
What is Gap Insurance?
Gap insurance covers the “gap” between the amount owed on your loan
and your car’s actual cash value
(ACV), if your car gets totaled or stolen. Gap insurance is typically
very affordable to add to an insurance policy. Adding this type of
insurance can protect you from having to pay the difference between
your loan amount owed and ACV.
For example, if you owe $14,000 on your car loan and your
car’s ACV is $10,000, you’ll have to cover the $4,000 gap
between what you owe and your car’s value. Keep in mind,
you’ll still have to pay your deductible, too.
How Gap Insurance Works
buy or lease a vehicle, your new car immediately starts to lose value as soon as you drive
off the lot. Some estimates suggest that
a car’s worth goes down 20 to 30 percent during the first
and as much as 18 percent each year following. If your car is
financed, you may benefit from gap insurance if you get into a
total-loss accident soon after you purchase your vehicle.
Who Needs Gap Insurance?
Gap insurance isn’t a state requirement, but this
add-on insurance can be helpful in certain situations. In some cases,
a creditor or lienholder may require you to purchase gap insurance as
one of the conditions for the car loan. If you’re wondering
whether or not you need gap insurance, consider the following
situations, in which you may benefit from the added coverage.
People that made a small down payment
Generally, car buyers are encouraged to
make a down payment of at least 20 percent when
applying for a car loan. The unfortunate reality is that people often
put down less than that. In fact, an
in 2019 found that the average car loan down payment was 11.7 percent.
Gap insurance can protect you in the case of the total loss of your
car within the first couple of years if you put down less than 20
percent as a down payment. A few hundred dollars of gap insurance will
cover the difference between what you owe on a loan and your insurance
Financed For 48 to 60 Months or Longer
Long-term financing gives you plenty of time to pay off your auto
loan. Borrowers with long-term financing make lower monthly payments
but are also left upside-down on their loans for longer. Auto loan
terms longer than four years leave a considerable amount of time for
you to be underwater on your loan.
Most lenders require you to get gap insurance when a brand new vehicle
is leased because new cars depreciate faster than used vehicles within
the first few years. Sometimes, gap insurance is included in the
lease, but not always. Even if your lender doesn’t require gap
insurance, you may want to consider it.
Purchased Vehicle That Depreciates Faster Than Average
The average car depreciates at a quick rate, but some cars depreciate
even faster. It’s important to consider the model and make of
your car before purchasing a new or used vehicle. Generally, American
and German luxury car brands experience the most depreciation.
People That Drive A Lot
Higher mileage on your odometer means that your car’s value will
depreciate faster than others.
If you drive more than 15,000 miles per year, you may
want to invest in gap insurance to protect you in the case of a
complete car loss.
You Won’t Be Able to Cover the Gap Out of Pocket
If you’re involved in an accident where your car can’t be
replaced and you still owe money on your auto loan, gap insurance
covers the difference between your auto loan amount and ACV, meaning
the gap insurance reimbursement will pay the auto lender to settle
Is Gap Insurance Worth It?
In reality, there are many situations where gap insurance can be worth
it. Even if you have great
defensive driving skills, others may not. Is your car liable to be stolen? Gap insurance can
cover you in case of theft or natural disasters such as hurricanes,
wildfire, flooding, and more.
Gap insurance adds protection on top of your comprehensive and
collision insurance. Comprehensive and collision insurance will pay up
to the current market value of your car. Gap insurance covers the
Who Does Not Need Gap Insurance?
Gap insurance can undoubtedly help many recover their car loss during
an accident or theft, but this isn’t the case for every car
owner. Here are a few situations where gap insurance wouldn’t
make sense financially:
Car is worth more than the loan and insurance company’s total
loss payout will exceed the amount of the loan
- You can pay off loan payments in the case of a total loss
You don’t need to replace your vehicle in the case of total
- Short-term loans (6 to 12 months long)
How to Get Gap Insurance
If you’re interested in buying gap insurance, you have a few
options on where to buy it: from a car insurer, from a dealer, or from
a third-party company. But don’t wait too long to decide if you
need gap insurance, especially if you’re a
first-year driver. New drivers are more likely to get in car accidents than
experienced drivers. Here are a few ways you can get gap insurance
with pros and cons for each option.
Purchasing from a Dealer
Most car insurance experts recommend avoiding buying gap insurance
from a car dealership. It can be tempting to buy gap insurance from
your dealer to reduce the amount of time you go without it, but gap
insurance rates from a dealership can be
up to 4 times higher than car insurance company rates. Buying
from a dealer can be the most convenient option, but you should always
shop around for the best deal.
Purchasing from a Car Insurance Company
Buying gap insurance from a car insurance company can provide you with
the best rates. If you switch insurance carriers, make sure that your
gap coverage is honored by your new insurance carrier. A few extra
dollars a month could financially protect you in the case of a total
loss while you’re upside-down on your auto loan.
Gap Insurance vs. Loan/Lease Payoff
A loan/lease payoff is an alternative to gap insurance. Some car insurance companies won’t offer gap insurance 30 days
after you buy a car,
but loan/lease payoff coverage is more flexible. Loan/lease payoff
usually only covers 25 percent of the ACV of your vehicle. Before
buying loan/lease payoff coverage, compare what you owe to your
car’s ACV to see if the payoff percentage will be enough to
cover out of pocket costs in the case of a total vehicle loss.
How Much is Gap Insurance
Gap insurance is an insurance add-on that isn’t as expensive as
comprehensive or liability coverage. Gap insurance can run you
about $20 per year
on average, on top of your current insurance coverage. You may pay
about 5 percent of your annual insurance premium for
comprehensive and collision coverage. That means that if you pay a
$500 annual premium, your gap insurance could be about $25 per year.
Some lenders can charge a flat fee between $500 and $700.
Where and how you get gap insurance can affect how much more you pay
for it. The cost of your gap insurance depends on a variety of factors
- Current market value of your car
- Your age
- Previous car insurance claims
Gap Insurance Limits and Exclusions
Make sure to read the fine print of your gap insurance terms before
adding it onto your existing policy. Some insurers may only pay a
percentage of the gap between what you owe on your loan and your
car’s ACV. They may increase the gap limit if you pay higher
Gap insurance limits and exclusions will also vary by state. Here are a few losses that gap insurance doesn’t cover.
Gap insurance only covers the loss of your vehicle, not medical
expenses due to a bodily injury sustained in the accident. Bodily
injury liability covers the medical bills of the person you hit.
Personal injury protection will cover you and your passengers’
Gap insurance will not cover any property damage from the car
accident. Property damage is covered under property liability
insurance. If you damage property, you’ll have to cover what the
other person owes on that property.
Car repairs are not covered under gap insurance. Whether its front
bumper damage or engine repair, gap insurance won’t cover any
type of car repairs. Gap insurance only covers the difference between
what you owe on your loan and your insurance payout.
When you purchase comprehensive and collision insurance, you can
select the best deductible and premium ratio for your budget. In the
case of a car accident, gap insurance will not cover your deductible.
Cars depreciate at a particularly fast speed compared to other
high-priced investments. Within the first five years, your car could
depreciate by more than half of its original retail value. Gap
insurance won’t be applied unless you have a total car loss.
If you want to protect yourself from any unforeseen situations that
can leave you without a car and still owing on your loan, gap
insurance may be the right coverage option.