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What Is Gap Insurance? How Does Gap Insurance Work?

If you’re planning to buy or lease a new vehicle, it may be smart to spend a few extra dollars to add gap coverage to your car insurance policy.

gap auto insurance coverage

Gap auto insurance covers the cost difference between what you owe on a leased or financed car and what is covered by your insurance company should it get totaled in an accident. Gap stands for “guaranteed asset protection.”

The minute your new car leaves the lot, it decreases in value. If your car is totaled when you still owe money on it, your insurance company will still only reimburse you for its market value, which is usually considerably less than what you owe. Gap insurance covers the difference between what your insurer values your new car at and what you owe on it so that you don’t have to continue paying off a car you can’t drive.

This article covers the following Gap insurance topics.

What Does Gap Insurance Cover?

Gap insurance pays out if your vehicle is declared a total loss. That means that your gap insurance will apply if your car is totaled or stolen.

For example, you purchase a new Toyota and owe $20,000 on it when you drive out of the dealership. Then, you get into an accident and the car is totaled. Your car insurance company will reimburse you $15,000 for the actual cash value of your new car, but you still have $5,000 to pay off. If you have gap insurance, you won’t have to pay that $5,000. The difference between the amount you still owe and the money from the reimbursement is covered with gap insurance.

Your gap insurance will apply to a stolen vehicle only if it is never recovered. In that case, it's considered a total loss and it would trigger your gap insurance coverage. If the car is found, but is repairable, or if you’re found to be negligent (because you left the keys in the ignition, for example), your gap coverage won’t apply.

Your gap insurance doesn’t work if you don’t have auto insurance. It’s also possible your gap insurance won’t be honored if you don’t have both collision and comprehensive coverage, so carefully review your policy’s declarations page to see if that is the case.

Gap Insurance for a Used Car

You usually shouldn’t buy gap insurance for a used car, although there are exceptions. The difference between what a person owes on the car and what it’s worth is at its greatest when the car is still new. That gap gradually decreases over time— it usually ceases to exist within about three years. If you want to buy a barely used car, or if your existing car is just a year or two old (and isn’t currently covered by this type of insurance), you could consider gap insurance. Beyond that, though, you should pass on it.

One noteworthy exception: you buy a used vehicle for more than its depreciated value and finance it without a down payment. In this situation, what you owe on the car is more than it’s worth, so a meaningful “gap” could exist for at least a brief period.

Do I Need Gap Insurance?

Most leasing companies require gap coverage—or “loan/lease coverage,” as it’s sometimes called—and even include it in the contract. Legally, though, you’re not required to purchase gap coverage when insuring a leased car.

You may not have to worry about contacting insurance companies and comparing quotes if you go the leasing route. Review your loan documents to make sure you don’t already have gap insurance coverage before you decide to pay extra for it.

Should I Get Gap Insurance?

If any of the following scenarios apply to you, consider purchasing gap insurance:

  • Buying a brand-new car: When you purchase a new vehicle, it depreciates in value the instant you get the keys. According to Edmunds, a new car loses 11 percent of its value once it leaves the lot. After five years, your car will be worth an estimated 37 percent of its initial value. Most people don't outright buy a new car with cash. They finance it and pay it off over time. That's where gap insurance is most important: when the value of the car is less than the amount owed. And that's usually the case when buying a brand-new vehicle.
  • High interest loans: Purchasing a vehicle with a high interest loan means the car costs more than it's worth in the long run. If you buy a car for $10,000 on a 48-month loan with an eight percent interest rate, you'll end up paying about $11,700 in total. The car will quickly depreciate, putting you in financial risk if the car is totaled. This is another scenario where gap insurance can save you a lot of money in the event of a bad accident.
  • Long term loans: If you purchase a vehicle with a loan term longer than 60 months, buy gap insurance. Spreading your loan payments out over a long period of time makes it difficult to catch up with the cars depreciating value. A lengthy loan virtually ensures you will have negative equity at some point.
  • Buying a collectors or classic car: Unique or modified cars are usually worth more than the value assigned by insurance companies. Gap insurance can help address the discrepancy.
  • Little or no down payment: Skimping on a down payment leaves the bulk of the car's costs to be paid in the future. If you can't afford a substantial down payment, consider gap insurance.
  • High mileage: If you commute more than 15,000 miles a year, your car will depreciate faster than average. Cars quickly depreciate as is, consider buying gap insurance if you drive a lot.

How to Get Gap Coverage

Most major auto insurance companies offer gap policies. You can also purchase gap insurance from your car dealership or through a lender. First, check with your current car insurance provider (if you have one) and see what they offer. You may be entitled to policy bundle discounts.

If you want to save money, be wary of buying gap insurance from your car dealer to insure your new car. Instead, get gap insurance quotes from insurance companies and credit unions first. There's a higher chance of getting a deal if you compare quotes.

How Do I Know If I Have Gap Insurance?

If you’re unsure whether you have gap insurance, ask your auto insurance company or check your lease or loan terms. You may have purchased it from your dealer when you got your car, so be sure you’re not already paying for it before you get additional coverage. If you have it and don’t need or want it anymore, you are free to stop your gap (or loan/lease) insurance. You can remove it from your policy as soon as you no longer owe less than your car is worth—or earlier than that, if you wish.

How Do Gap Insurance Refunds Work?

You can cancel your gap insurance if you’ve already paid off a chunk of your car loans and don’t need it anymore. If you prepaid for coverage, you’ll be refunded for premiums you haven’t used. Be aware that there are occasional stipulations when canceling insurance during a policy term.

How Much Is Gap Insurance?

Most dealerships sell gap insurance coverage for an average cost of $500 to $1,000, and many require a large upfront payment. If you buy it from a dealership, the cost of gap insurance could be more than from an insurance company. If you turn to an insurance company for this type of coverage, it’ll add a few extra dollars to your monthly or biannual payment.

According to the Insurance Information Institute, budgeting about $20 annually for gap coverage is a safe bet.Shop around and compare quotes for gap auto insurance policies from several companies to find the lowest rates.

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Is Gap Insurance Worth It?

Gap insurance is a cheap way to make sure you’re covered in case the worst-case scenario happens- your car is totaled in an accident and you still owe money for it. It’s an inexpensive coverage option that could cost you only $20 a year. If you’re still paying off your car, it’s recommended that your purchase gap insurance.

Gap Insurance Companies

Most major car insurance companies offer gap as additional coverage that you can add to your auto insurance policy. Gap insurance is inexpensive if you purchase it through your insurer.

Company Is Gap Insurance Offered?
GEICO No
State Farm® Yes
Progressive Yes
Allstate Yes
USAA Yes

Gap Insurance in Your State

Generally, gap insurance is not a legal requirement, but your leaser could require it. Laws surrounding gap insurance can vary depending on which state you live in. For example, in Texas, it’s illegal for gap waivers to be required for car leases or loans. Whereas in Florida, gap insurance is optional, but your lender can require you to purchase it.

 

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