Why to Consider Gap Insurance

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

When you 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 year 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 Edmunds analysis 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 company’s payout.

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.

Leased Vehicle

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 your loan.

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 rest.

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 loss
  • 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 including:

  • Current market value of your car
  • Your age
  • State
  • 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 premiums. Gap insurance limits and exclusions will also vary by state. Here are a few losses that gap insurance doesn’t cover.

Medical Bills

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’ medical expenses.

Property Damage

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.

Repairs

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.

Deductible

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.

Depreciation

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. 

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