Gap insurance covers the cost difference between what you owe on a financed or leased car and what your insurance company will pay out if it’s totaled or stolen. In other words, if you buy gap insurance, you won’t have to keep paying for a car you can’t drive if something happens to it before you’ve settled the loan or finished the lease.
A new car depreciates in value the second you drive it off the lot. If your vehicle gets totaled or stolen while you still owe money on it, your insurer will only reimburse you for its current market value, which could be a lot less than what you owe.
If you need a comprehensive guide to gap insurance, we’ve got you covered:
What is gap insurance?
Gap insurance, which stands for “guaranteed asset protection,” is an add-on coverage that pays out if your car is totaled or stolen and you owe more than its depreciated value. It’s intended as a supplement to comprehensive or collision insurance, which only reimburses you for your car’s current worth.
For example, say you buy a new Toyota and owe $20,000 on it when you leave the dealership. Then you get into an accident. Your insurance company declares it totaled. It reimburses you $15,000 for the actual or current cash value of your vehicle, but you still owe $5,000 on it because the vehicle depreciated as soon as you drove it off the lot.
If you have gap insurance, you won’t have to pay that $5,000.
However, if the police find your car and any damage done to it is reparable, your gap coverage won’t apply. The same is true if your insurance company finds you negligent — because you left the keys in the ignition, for instance.
How much does gap insurance cost?
Gap insurance could cost you just a few extra dollars per month, depending on where you buy it and your driving background. For instance, Progressive offers gap insurance to its customers for an additional $5 per month, on average.
Another place that offers gap insurance is car dealerships. However, we do not recommend purchasing gap insurance through this option. Dealerships may try to bundle gap insurance with your loan or lease, making your rates much more expensive. Most dealers sell gap coverage for $500 to $1,000 per year. Many require a large upfront payment, too.
Insurers determine the additional cost of gap insurance by factoring in the current value of your car, your age and your driving history. However, a major cost determinant is the company you select for coverage.
To find the lowest rates on gap insurance, shop around and compare quotes from several companies.
Is gap insurance required?
You might need to buy gap insurance if you finance a car, and you’ll likely need to buy it if you lease a car. Most leasing companies require gap coverage. Many even include it in the contract. Review your contract and make sure you don’t already have gap insurance before you agree to pay extra for it.
State laws do not require drivers and car owners to buy gap insurance. State laws do sometimes impact whether a lender or lessor requires gap insurance, though. In Texas, for example, it’s illegal for lenders or leasing companies to require gap waivers.
What gap insurance does and doesn't cover
Gap insurance covers the “gap” between what you owe on a vehicle and what it’s currently worth. It only covers this gap, though, if your vehicle is totaled or if your vehicle is stolen and not recovered.
You don’t have to total your car in an accident to benefit from gap insurance. Your collision and gap insurance coverage should kick in if any of these events or disasters total it, too:
As for what gap insurance often doesn’t cover, here are a few examples:
- Your car insurance deductible costs
- Mechanical repair costs
- Down payment costs for a new car
- Overpaid loan or lease payments
Is gap insurance worth it?
Gap insurance may be a good idea if you owe more than what your car is worth — as is almost always the case with new cars.
Gap insurance may be worth it if you meet the following criteria, according to the Insurance Information Institute (III):
- Your vehicle down payment is less than 20%.
- Your auto loan is for five years or more.
- You lease your vehicle.
- You buy a car that depreciates faster than most others.
Gap insurance is a cheap way to make sure you’re covered if a car you owe money on is totaled or stolen. If you’re still paying off your car, give some serious thought to this inexpensive coverage option.
You should at least consider buying gap insurance if you plan to buy a new car, get a high-interest loan, get a long-term loan, make a small down payment or have a full-coverage policy.
Here’s why you should think about getting gap insurance in each of these situations:
Buying a new car
According to the III, most cars lose 20% of their original value after the first year. This is where gap insurance is most important and helpful: when the current value of a car is less than the amount owed.
If you buy a car for $10,000 on a 48-month loan with an 8% interest rate, you pay about $11,700 for it in total. The car will quickly depreciate, too, and that puts you at financial risk if something happens to it. This is another case where gap insurance can save you a lot of money if a thief steals it or if you total it in an accident.
If you buy a vehicle with a loan term of 60 months or more, consider buying gap insurance. Spreading out your loan payments over a long period of time makes it difficult to catch up with the vehicle’s depreciating value.
Making little or no down payment
Skimping on a down payment means you’ll pay the bulk of the car's costs in the future. If you can't afford to make down payments, think about adding gap coverage to your auto insurance policy.
Having a full-coverage policy
Gap insurance is meant to work alongside a full-coverage policy. As a result, lenders and insurers might require you to purchase collision and comprehensive coverages before you buy gap insurance. Carefully review your policy’s declarations page to see if this is the case before purchasing it.
Where can you buy gap insurance?
Car insurance companies and dealerships are the two places you’ll be able to buy gap insurance. Before signing on for gap insurance, make sure you carefully read through the original contract.
Most major car insurance companies offer gap coverage. They usually sell it as additional coverage you can add to a standard auto insurance policy.
It’s important to note that you may pay more if you get gap insurance from a dealership. On average, dealers sell gap coverage for $500 to $1,000 per year because they charge extra for shopping around for you. Many require a large upfront payment, too.
Here are some widely available insurers and whether or not they sell gap insurance:
|Company||Offers gap insurance?|
Keep in mind as you shop for this coverage that not all companies call it gap insurance. USAA, for instance, calls its offering “Total Loss Protection”.
Additionally, some companies sell products that are similar to gap insurance but differ from it in various ways. For instance, State Farm’s “Payoff Protector” is a loan agreement that cancels a customer’s remaining unpaid principal balance in the event of a total loss. It is not an insurance policy.
Regardless of who you purchase the coverage from, always save a copy of your policy or loan/lease agreement.
Comparing gap insurance rates from multiple companies is one of the best ways to save money.
Find out how much you can potentially save.
Can you get gap insurance at any time?
Depending on your insurer, you may be able to purchase gap insurance for a car you’ve already had for a while. Don’t expect it, though. Many insurance companies won’t sell you gap coverage if your car is more than two to six years old, or if you’re not the first owner.
If you drive an old car but want gap insurance, start by shopping around. The more insurers you ask, the more likely you are to find one that’ll sell you gap coverage for an older vehicle.
An alternative option you can also check out is a loan/lease payoff. Some insurers, like Progressive and Travelers, refer to gap insurance and loan/lease payoff as the same thing. However, other companies will draw a distinction between the two. Usually, loan/lease payoff reimburses you by a set percentage of your car’s value in addition to what you receive from filing a regular claim.
How do you know if you already have gap insurance?
Contact your car insurance company if you aren’t sure if you have gap coverage. Check your loan or lease documents, too. They should tell you if you have gap insurance.
You may have bought gap insurance from your dealer when you got your car, so double check and make sure you’re not already paying for it before you buy this coverage elsewhere.
If you have gap insurance but don’t need or want it anymore, you may be able to cancel your coverage. Again, though, review your lease or loan terms to find out if and when you can do this.
What if you want to cancel your gap insurance?
Drivers who would like to cancel their gap insurance should start by contacting the insurer or dealer the coverage was purchased from. Each company has its own step-by-step process for removing optional coverages from an auto insurance plan. Be aware that you may need to jump through some hoops when canceling insurance during a policy term.
If you prepaid for gap coverage, you might be able to receive a refund for the premiums you haven’t used. We recommend you review the original contract you signed to see if you qualify for a refund.
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