Is Gap Insurance Worth It? Everything You Need To Know About Gap Insurance

Is Gap Insurance Worth It? Everything You Need To Know About Gap Insurance

Purchasing a brand new car is an expense that not everyone can afford out of pocket; in many cases, financing is required for this purpose. If your vehicle is totaled or stolen, you will still be responsible for the outstanding loan balance, in addition to the cost of purchasing or renting another vehicle to make up for the loss.

In the event that your basic automobile insurance policy contains new car replacement coverage, it may be able to assist you in defraying the cost of purchasing a new vehicle. If your car is totaled beyond repair and its depreciated worth is less than the amount of money you still owe on your loan, gap insurance will cover the difference between the claim payout and the amount you still owe on your loan. It is possible to purchase Guaranteed Asset Protection (GAP) as an optional endorsement, which pays the difference between the loan amount and the vehicle’s depreciated value.

It is the last thing you want to hear if your automobile is declared totaled or stolen: that you owe more money on your loan than the vehicle is worth.

In the event of a total loss settlement, your vehicle insurance provider will pay the value of your automobile, not the amount you owe on a car loan or lease. That has the potential to make a significant difference. For example, if you owe $20,000 on a loan but your automobile is only worth $17,000, you will be responsible for $3,000 in interest to your lender. Not to mention the fact that you’ll have to buy a new car.

One method to prevent this financial snag is to purchase gap insurance. A gap insurance policy is an optional coverage that you can purchase to cover the difference between what you owe and the value of your totaled or stolen vehicle. Other names for gap insurance include “loan/lease payback” and “lease default insurance.”

What is gap insurance?

Car insurance gap coverage is an optional coverage that pays the difference between the amount owing on a vehicle and its actual cash value (ACV) in the event that the vehicle is damaged, destroyed, or stolen in the course of an insured claim.

If you are planning on leasing or purchasing a car, or if you have already done so, you may be asking whether or not you should purchase gap insurance, and if so, where you should purchase it.

Generally speaking, gap insurance is considered an optional policy for drivers. A car dealership is obligated to offer gap insurance at the time of purchase in some states, though this is not always the case.

Consider the following scenario: you have been involved in an accident and your vehicle has been damaged beyond repair, necessitating its replacement. Despite the fact that you still owe $18,000 on your auto loan, the vehicle is now only worth $15,000. Even after deducting your deductibles, gap insurance would cover the $3,000 difference between what you owe on your automobile and what it is currently worth on the open market. Some insurance policies additionally cover the cost of the deductible.

It’s important to remember that gap insurance is normally only available for vehicles that are brand new or models that are less than a year old and have been totaled or stolen. The policy does not cover any incidents such as accidents, damages, repairs, or a sale or trade-in, even if the financed amount is greater than the vehicle’s worth. A new automobile replacement policy would be required to cover the costs of purchasing another vehicle, and this would be in addition to your existing policy.

How does gap insurance work?

Early in a car’s life, it’s rather simple for a driver to end up owing the loan or leasing company more money than the automobile is worth. A small down payment and a long loan or lease time are sufficient to accomplish this, at least until your monthly payments accumulate enough equity in the car to warrant a purchase.

When it comes to filing claims and determining the value of the vehicle, equity must equal the current market worth of the vehicle. If the automobile is totaled, your regular insurance will reimburse you for the value of the car, not the amount you paid for it. In reality, cars depreciate rapidly during their first couple of years on the road, which causes an issue. In reality, the average automobile loses ten percent of its value in the first month after it is purchased, according to industry statistics.

In the event that your vehicle is totaled, your insurance policy will not cover the expense of replacing it with a brand-new vehicle. You’ll receive a check in the amount of what a car similar to yours would sell for on a used-car lot in your area. This is referred to as the vehicle’s actual cash worth by insurance companies.

That particular gap isn’t covered by gap insurance, unfortunately. In order to minimize financial losses to you, the reimbursements are calculated on the basis of actual cash value rather than replacement value.

What doesn’t gap insurance cover?

Gap insurance does not cover the following:

  • car payments in the event of financial trouble, job loss, incapacity, or death vehicle repairs
  • the value of your vehicle or the remaining debt on a loan

If your vehicle is repossessed, you will be responsible for the following:

  • a rental car while your vehicle is being repaired
  • the diminished value of your vehicle following an accident
  • a down payment on a new vehicle; carry-over balances on any loans you rolled over into your new car loan
  • any extended warranties you add to your car loan.

In brief, gap insurance is not “super coverage” that protects you if you lack enough motor insurance or are unable to repay your loan.

How much is gap insurance?

You can buy gap insurance from a few locations — principally the dealership or lender who is financing your automobile, or straight from an auto insurance provider. Gap coverage is often more expensive if you purchase it from the dealership or lender versus adding it to your car insurance policy.

That said, a few factors may affect your gap insurance premium. Your insurer will likely evaluate numerous factors, including your vehicle’s actual cash value (ACV), geographic region, age, and auto insurance claims history. Ask your auto insurer if it offers gap insurance and how much it would cost based on your scenario to understand if gap insurance is the proper financial protection for you.

According to the Protection Industry Institute, you can add gap insurance to your standard comprehensive auto insurance coverage for as little as $20 per year. Having stated that, your cost will vary according to the standard insurance laws. That is, your state, age, driving record, and the vehicle’s model all affect the price.

Typically, a big insurer will charge between 5% and 6% of the collision and comprehensive premiums on your auto insurance policy. For instance, if you pay $1,000 per year for both coverages, you’ll only need to pay an additional $50 to $60 per year to secure your loan with gap insurance. According to Bank Rate Monitor, going via an insurer for gap coverage is typically less expensive than going through the dealer or a lender.

Pros and cons of car gap insurance

Buying a new car is an expensive proposition these days. The typical new auto loan is in excess of $32,000. The average loan length is now 69 months.

You wouldn’t conceive of skipping collision insurance on that car, even if your lender authorized you to do it. But you may consider gap insurance to supplement your collision insurance for the amount of time that you owe more for that car than its actual cash value. That is what your collision insurance policy will pay out if the automobile is ruined.

This is most usually the case in the first few years of ownership if you put down less than 20 percent on the car and stretched the loan payback term to five years or more. A short peek at a Kelley Blue Book can tell you whether you need gap insurance. Is your car currently worth less than the sum on the loan? If so, you need gap insurance.

When to consider gap insurance?

If you’re unsure whether you require gap insurance, there are a few factors to consider. Gap insurance is an excellent choice for the following drivers:

  • Automobile owners who owe more on their loan than the vehicle are worth. If you presently have a car loan, make sure to calculate the loan balance and compare it to the vehicle’s current cash worth. (Again, this is distinct from the purchase price of the vehicle.) Is there a discrepancy? If this is the case, you should strongly consider purchasing gap insurance.
  • Drivers are required to purchase gap insurance as part of their automobile loan. Regardless of the amount owed on your loan, some lenders require gap insurance at the time of loan origination.
  • Gap insurance is required for drivers whose leases demand it. Numerous auto leases need gap insurance as a safeguard. Depending on the leasing provider, gap insurance may already be included in the lease fee.

Drivers who own their automobile outright or owe less on it than its current actual cash value (since there is no “gap” in value) do not require gap insurance, but will still require car insurance coverage to protect themselves and their vehicle from the unexpected.

Gap insurance for leased cars

Leased vehicles depreciate at a rapid rate, just like any other car or SUV. Because of this, if you did not put much money down yet still owe a significant amount on your total lease payment, you will almost certainly owe more money than the car is worth if you are involved in an accident. In this circumstance, gap insurance coverage for your lease may prove to be a wise financial investment.

As with purchasing a car, it may be beneficial to compare your overall cost — which includes taxes and any other expenses you folded into the lease — to the vehicle’s MSRP to evaluate if you have a gap in your monthly payments or not.

In addition, just like with a purchased vehicle, the difference between what you owe and what the automobile is worth reduces as you make monthly payments and as the car depreciates over time. As a result, you may not require insurance coverage for the whole duration of your lease. Depending on your leasing agreement, you may only require it for a few months at a time.

Is gap insurance worth it?

Lenders or auto insurance companies may recommend gap insurance for new vehicles when or if the following conditions are met:

  • The auto loan is for a period of five years or longer, and the interest rate is high because the principal on the vehicle will take longer to pay down than the depreciation on the vehicle will take.
  • You made a small down payment, often less than 20% of the purchase price.

A good rule of thumb is to compare the amount you will pay for your automobile over the course of your financing to the car’s MSRP or agreed-upon sales price to determine whether or not you have a significant difference from the start. In the event that this occurs, gap insurance may be beneficial.

Keep in mind that your “gap cost” is subject to constant fluctuation. In most cases, the difference between what you owe and what the vehicle is worth reduces as you make monthly payments and as the vehicle depreciates in value over time.

Other scenarios in which gap insurance may not be required include: if you have a child who is under the age of 18; if you have a child who is under the age of 18; if you have a child who is under the age of 18.

  • When a substantial down payment was required
  • If the initial loan period was short, say three years or fewer, this would not be an issue.

You have the ability to cancel the coverage at any time; however, this is normally recommended only when the amount owing on the car is less than the vehicle’s fair market value. If you are wondering whether gap insurance is worthwhile, consider the expense of not having it in place first. Insurance to cover the gap between your full-coverage policy and your current policy is rather inexpensive, and it may often be added to your existing policy for a minimal annual fee. In the event of a catastrophic accident, the gap between the worth of your automobile and the amount you owe may be significantly less.

Should I buy gap insurance?

You may have heard the term “upside-down” in reference to a home mortgage debt. The premise is the same whether the item financed is a house or a car: The thing financed is currently worth less than the sum of the loan that was taken out to acquire it.

This isn’t as awful as it sounds. If you put only a little money down on a purchase and pay the rest in small monthly installments stretched over five years or more, you don’t immediately own much of that house or car free and clear. As you pay down the principal, your ownership share expands and your debt diminishes.

Gap insurance at least covers the deficit so you’re not on the hook if the automobile is ruined.

Car Gap Insurance May Make Sense If…

According to the Insurance Information Institute, it may be a smart idea to consider obtaining gap insurance for your new car or truck purchase if you:

  • Made less than a 20 percent down payment
  • Financed for 60 months or longer
  • Leased the vehicle (carrying gap insurance is often necessary for a lease) (carrying gap insurance is generally required for a lease)
  • Purchased a vehicle that depreciates quicker than the average
  • Rolled over negative equity from an old automobile loan into the new loan

In these cases, gap insurance could shield you against potentially unfavorable financial implications if the vehicle were to be declared a total loss.

You May Be Able to Skip Gap Insurance If…

If you’re still paying off your automobile, you almost surely have collision coverage. You’d be playing with fire without it, and, in any event, you’re probably required to carry collision coverage by the conditions of your loan or lease agreement.

  • You made a down payment of at least 20 percent on the automobile when you bought it, so there’s a minimal chance you will go upside-down on your loan, even in the first year or so that you own it.
  • You’re paying off the auto loan in less than five years.
  • The automobile is a make and model that traditionally keeps its value better than normal.

It’s recommended to check the National Automobile Dealers Association (NADA) guide or Kelley Blue Book occasionally to get a sense of how much your automobile is worth. Compare that to your loan balance. If your loan balance is less than your car’s worth, you no longer have a gap to worry about.

How to get gap insurance?

The benefit of gap insurance mostly depends on its cost. If you think gap coverage would be valuable for you, find out what your alternatives are, starting with these simple steps:

  • See whether you already have it. Check your lease or loan documentation to discover whether you’re already paying for this coverage.
  • Ask your insurance company for a quote. If your insurance carrier doesn’t offer gap coverage, you may have to shop elsewhere for it.
  • You may either acquire prices on standalone gap insurance or shop for quotations on your whole auto insurance policy to compare rates.

Once you have an idea of what gap insurance will cost, examine if it’s worth the money. For a few dollars, having this added security might help you sleep at night. For hundreds of dollars, you’ll have to make the call. Whatever you chose, remember that you don’t need gap insurance forever. Once you’ve paid enough on your car loan to erase the gap between your car’s value and your loan debt, you no longer need gap coverage.

Where can I buy gap insurance?

Some motor insurers, like Geico, do not offer gap insurance, while others vary in how this protection is offered and how it operates. Here’s a short look at a few options:

  • State Farm: The largest vehicle insurer in the U.S., State Farm does not offer gap insurance but offers a feature called Payoff Protector, which anyone acquiring a car loan from a State Farm bank (an affiliation with US Bank) is eligible for. Payoff Protector only applies for full coverage automobile insurance, although this policy does not necessarily have to be underwritten by State Farm. Even if your auto insurance policy is written by a different insurance provider, if your loan is from State Farm, you are eligible for Payoff Protector at no extra cost.
  • Allstate: The Allstate gap program waives the difference between a main auto insurance settlement and the outstanding balance payable on a vehicle. It waives covered losses up to $50,000 and reimburses a deductible payment. The deductible is the amount of the claim you are responsible for and is taken from your insurance reimbursement at the time of a loss.
  • Progressive: Progressive caps coverage at 25 percent of the vehicle’s actual cash value. You can acquire gap insurance coverage bundled into your existing policy with the company for as little as $5 per month.
  • Nationwide: Nationwide offers gap insurance but does not waive your deductible if you file a claim, so be cautious of whether your deductible is low enough that you can afford it in event of a total loss.
  • AAA: AAA provides gap coverage for automobiles that are fully covered, including optional comprehensive and collision insurance. The insurer will waive up to $1,000 of your deductible if your automobile is considered a total loss.
  • Esurance: Esurance (and several other vehicle insurers) refers to gap insurance as an auto loan and lease coverage. You may qualify for coverage if you are leasing or paying off a financed vehicle and have full-coverage insurance.
  • USAA: USAA auto insurance is provided to active and former military and their family members. USAA offers Total Loss Protection for automobiles less than seven years old that have a car loan of more than $5,000. It reimburses up to $1,000 of a deductible.

Can I get gap insurance after I buy a car?

You may be able to get gap insurance after you buy a car, depending on the model year of the vehicle. Gap insurance isn’t just sold at auto dealerships – several insurers offer gap insurance as part of a car insurance policy. And, according to the III, obtaining gap coverage via an insurance carrier generally costs less than buying it from a car dealership.

Some insurers want your vehicle to be brand new in order for you to purchase gap insurance. That may mean:

  • That you are the original owner of the vehicle (you have the original lease or loan on the vehicle) (you have the original lease or loan on the vehicle)
  • That the vehicle is not older than two or three model years

Check with your insurer to determine what requirements are required for you to acquire gap insurance.

How do I get the best deal on gap insurance?

In terms of where to purchase gap insurance, you have a few options: through the dealership, through a conventional vehicle insurer, or through a specialty gap insurance firm.

A gap insurance coverage purchased through a dealership may be prohibitively expensive for some drivers, despite the fact that it is a convenient alternative. Consider shopping around between the dealership, auto insurers, and companies that specialize in gap insurance; you may find that the best bargain is available through your current auto insurance provider. Depending on whether you already have comprehensive coverage, you may be able to add gap insurance for a minimal annual fee.

Do I get money back from gap insurance?

If you pay off your vehicle loan in full before the term is over, you may be eligible for a return of the portion of your gap insurance that was not used. For example, if a 36-month loan with gap coverage for 36 months is paid off in 24 months, certain jurisdictions compel insurance companies to reimburse the premiums paid.

In some instances, an insurer may fail to notify you if you are entitled to a refund. Keep your payback letter, the original contract or insurance information, as well as an odometer disclosure statement, safe and secure in your possession. Before purchasing gap insurance, it is essential to understand the insurer’s refund policy. For example, it may be beneficial to speak with your state’s commerce department or insurance commissioner’s office ahead of time to learn about your state’s regulations and what to do in the event that your insurer refuses to grant a refund.

How does gap insurance work if your car is totaled?

If you have gap insurance, it only protects you against the difference between the real cash worth of a car at the time of a complete loss claim and the current amount outstanding on an auto loan. Total loss can vary depending on state legislation and/or the insurance provider in question.

Do I need gap insurance if I have full coverage?

Auto insurers do not often offer a single policy referred to as “full coverage” that is designed to protect you against every conceivable scenario, despite the fact that you may believe your coverage is comprehensive. Instead, you can increase your protection by combining several types of coverage (such as liability, collision, and comprehensive) into a single policy. If you already have auto insurance, you may find that adding gap insurance to your policy will provide you with greater peace of mind. Drivers’ coverage requirements and perks, on the other hand, will differ significantly.

Alternatives to gap insurance

Gap insurance is not the only strategy to safeguard yourself in the event that your vehicle is stolen or totaled. Consider the following additional options.

Loan/lease payoff

Loan/lease repayment is distinct from gap insurance in several significant aspects, although some insurers use the phrases interchangeably. Gap coverage is only available if you purchase a new vehicle; however, loan/lease payoff may be offered on used vehicles. Additionally, loan/lease payment pays a certain proportion of the vehicle’s worth, typically about 25%, in addition to the claim check, rather than the debt balance.

New car replacement insurance

If you’re more concerned with purchasing a new vehicle than with paying off your current one, new car replacement coverage may be a better option for you (albeit more expensive). This coverage assists you in replacing your vehicle with a new one of the same make and model, minus your deductible.

Better car replacement coverage

If you do not own a new car, you may be unable to purchase new car replacement coverage or gap insurance. Should the worst-case scenario occur, your insurer may offer a better car replacement to cover your loan debt.

The bottom line

Unless required by the terms of your lease or loan agreement, gap insurance is normally an optional insurance coverage. Nonetheless, it may provide you with some peace of mind if you recently purchased a new car. Car gap insurance is particularly prudent for people who have big negative equity on their vehicles. This includes drivers who make a little down payment or have a lengthy loan payoff time. If you’re looking to save money on your auto insurance, not paying for gap insurance when you don’t need it is one method to do so.

Is gap insurance worth it? In the appropriate circumstances, it may be. Gap insurance kicks in if your automobile is stolen or totaled in an accident. While you may be a cautious, responsible driver, others may not be. If you are “upside-down” on your auto loan, you may be compensated for thousands less if you do not have gap insurance. Are you willing to risk the gap? Learn more about gap insurance and get a free quote today.

Tony Bennett

Tony Bennett

Tony Benett makes his living in the insurance industry by teaching and consulting. He is also recognized by the legal profession as an expert on insurance coverages. His insurance experience includes having worked at the company level, owned an independent general agency and having worked for an insurance association. He has received various certificates over the past few years and helps his clients and readers by giving them a realistic outlook on what they can expect to achieve within their set targets. At Insurance Noon, he is known for his in-depth analysis and attention to details with accuracy. He has been published as one of the most referred agents by his peers in the insurance community. Tony loves the outdoors and most sport events. His passion other than providing excellent advice is playing golf.