What is Gap Insurance and do I need it?

What is Gap Insurance?

Gap insurance is an alternative auto insurance policy that assists in paying off the auto loan if your car is damaged or stolen and you are owed more than your car’s depreciated value. 

Gap insurance is also described as “loan/lease gap insurance.” This insurance is only available to the original loan or leaseholder of a brand-new car. 

Gap insurance is a way to cover the difference between the depreciated value of your vehicle and the amount you owe on the vehicle.

What is Gap Insurance

How does gap insurance work?

Gap insurance refers to Guaranteed Insurance for Asset Protection. It’s an optional additional coverage that helps certain drivers fill this “gap” between the finance amount they owe on their car and the car’s Actual Cash Value (ACV) when there is an accident in which their car is declared to be a total loss.

Imagine that you are involved in a serious accident that causes you to be injured. The damage done to your vehicle is substantial. 

You go to the mechanic to find out that your car has been totaled. You’re covered by collision insurance. 

However, there’s an issue. Your vehicle is three years old, and the actual cash value is just $20,000. 

But you still owe $25,000 in debt on it! There’s a gap to bridge, and the gap insurance policy will cover it on your behalf (minus the deductible).

Contrary to what many believe, gap insurance does not mean that the insurance company will pay you the entire amount you purchased for your car. 

With gap insurance, your insurance company will pay you the amount you owe to your vehicle at the time of an insured accident and less than the deductible. 

The gap insurance may be an excellent supplement in a collision insurance policy based on your specific circumstances.

 

Do you need gap insurance?

If you’re trying to decide if you’re eligible for gap insurance, there are some aspects to consider. Gap insurance is an excellent alternative for the following kinds of drivers:

The drivers owe more on their car loans than their car’s value. If you’re currently paying for car loans, make sure you calculate the amount of the loan and compare it against your vehicle’s actual cash value. 

(Again, this differs from what you paid to purchase the vehicle.) Do you have a gap? If yes, seriously consider purchasing gap insurance.

Car loan holders who require gap insurance. Whatever you owe on your loan, certain loan providers need gap insurance from the start.

Drivers who lease require gap insurance. A lot of auto leases need gap insurance as a security measure. Some lease providers might already include gap insurance as part of the cost of leasing.

Owners of cars and those with a lower debt on their vehicle than its current amount (as there isn’t a “gap” between the value) are not required to have gap insurance but require insurance for their car to ensure that their vehicle is safe from unexpected events.

Does gap insurance cover theft?

Car theft is akin to getting it destroyed. When you woke up, you have a car, but within minutes you’re gone. Does that mean the gap insurance you purchased will function the same way? 

It is! If your vehicle was stolen and never recovered, it will provide the difference between the car’s cash value and the amount you owe to you. Car payments left unpaid can create unseasonal rain on an otherwise rainy day. 

How much does gap insurance cost?

If you need gap insurance, you’re probably thinking, “how much does gap insurance cost?” The cost varies by a myriad of variables, including:

  • The current actual cash value (ACV) of your car
  • Your age
  • The state you live in
  • Your previous car insurance claims

Bundling gap insurance with your existing insurance policy will typically cost you fewer insurance companies charging an average of $20 to $40 per year. 

However, you can buy it on your own at an average cost of between $200 and $300. 

Gap insurance for an older car could have a different price than gap insurance on an entirely new vehicle because the price of the car and its cash value will decrease with age and use. 

Remember that when the time comes to “close that gap” by paying less for your vehicle than the ACV of your car, you’ll no longer require gap insurance.

Where you can get gap insurance?

Your dealer might be able to offer you gap insurance with the new car you purchase. However, most car insurance companies also offer it, and it usually costs less than dealers. 

In most auto insurance policies, gap insurance which includes comprehensive and collision coverage, is only $20 per annual cost.

Is gap insurance worth it?

Perhaps you are still wondering if the gap insurance is worth it. It could certainly be if you are under the right conditions. Gap insurance is in its effect when there is a total loss of your car, like theft or an insured accident that makes your car a “total loss.”

Although you may be a careful, responsible driver, nobody driving around is. In the absence of gap insurance, if you’re “upside down” on the car loan, you may get reimbursed by a smaller amount should there be a total loss. Do you want to take a risk on the gap?