What Is GAP Insurance For Cars? Why Should You Buy It?

You might need gap insurance coverage to cover any loss when you finance or lease your car. But, you might not be well-equipped with what is GAP insurance for cars? Don’t worry and read this article to know everything about Gap insurance.

Car insurance is essential to stay protected on the road. If your car gets totaled or stolen, the last thing you want to hear is that you owe more on the car loan than the car is worth. If you have collision or comprehensive coverage, your car insurance company will pay the value of your car is a total loss settlement, not what you owe on a car loan or lease. That could be a big difference. For example, if you have $20,000 outstanding on loan but your car is only worth $17,000, you are on the hook for $3,000 to your lender if your car is totaled.

The one way to avoid or get away with this financial burden is gap insurance. Gap (Guaranteed Asset Protection) insurance is optional auto insurance coverage in addition to your collision and comprehensive car insurance, which applies if your car is stolen or deemed a total loss. When your loan amount is more than your vehicle is worth, gap insurance coverage pays the difference.

If you are still thinking about whether it’s a good idea to purchase gap insurance, if yes, what are the options?. Here’s what you need to know to make the right decision to stay safe on the road.

How does gap insurance work?

Gap insurance helps to cover the balance on your loan or lease when your car is totaled, and you owe more than your car’s worth. It is evident when you purchase a car, and the value starts to depreciate with time passing. Most of the car’s value depreciates by 20% when leaving the showroom or lot.

Here is an example of how gap insurance may work. Suppose you bought a brand-new car for $25,000. You still owe $20,000 on your auto loan when the car is totaled in a covered collision. Your collision coverage would pay your lender up to the totaled car’s depreciated value. Let’s say it’s worth $19,000. If you do not have gap insurance, you would have to pay $1,000 out of your pocket to settle your auto loan on the totaled car. If you have gap insurance, your insurer will help pay the $1,000. To qualify for gap insurance, you must have comprehensive and collision coverage on your policy.

If you do not have gap insurance and the outstanding balance of your loan or lease is more than your car’s value, you will be responsible for paying off the loan yourself. Some lenders or leasing companies might require you to carry gap insurance. It helps protect them from buyers who walk away from a loan or lease if the car is totaled or stolen.

Who needs gap insurance?

If you loan or lease your vehicle, you may want to consider purchasing gap coverage. It can help you avoid a potentially significant loss if your car is totaled. It can also help you meet any lender or lessor insurance requirements. Generally, gap coverage is a good idea if you:

  • Finance your new car for 60 months or longer
  • Lease your vehicle (often required)
  • Buy a car with a down payment of less than 20%
  • Buy a car that will depreciate quickly (e.g., some luxury vehicles or sports cars)
  • Plan to put a lot of miles on your car, which can speed depreciation
  • Want to roll the balance of your previous car loan into the new vehicle loan

The two things decide whether you need gap insurance or not: the value of your car and the balance on your loan.  You can estimate the value of your vehicle through vehicle valuation sites like Kelley Blue Book (KBB) or Edmunds. If the value of your car is below your loan balance, gap insurance may be worth considering.

Is gap insurance required?

There are no state or federal laws that require drivers to carry gap insurance, but if you lease or finance a new car, you may need it. When you finance a car, the lender maintains ownership until you make your final payment. If your car is damaged, totaled, or stolen before paying off the loan, the lender can lose money.

Lenders avoid that risk by requiring borrowers to buy specific types of coverage. In addition to comprehensive and collision coverage, some lenders or lessors also require gap insurance. The best way to determine if you need to purchase gap insurance is to check with the dealership or your lender.

Where to buy gap insurance?

There are usually three options when shopping for gap insurance on your new car:

  • Most companies offer gap insurance from your insurer, so always check the insurance company first.
  • From an online insurer that offers gap insurance.
  • From the dealership.

Your car dealer may offer you gap insurance on your new vehicle, but it can be expensive. Most car insurers also offer it, and they typically charge less than the dealer. Many car insurers offer gap insurance as an inexpensive endorsement, so your best bet may be to contact your existing insurer. You can often do this online through the company’s website or app.

There are plenty of companies that provide gap insurance. Gap insurance providers include many major car insurance companies. In some cases, when you are insuring a new car, you can get gap coverage as an add-on endorsement to your standard policy. However, you must also have collision and comprehensive coverage on the policy. You must check with your insurer to find out if they offer it or not.

Top 3 gap insurance companies – 2022

There are so many companies providing gap insurance in addition to your car insurance. The best gap insurance companies will cover 25 percent or more of the actual cash value of your car to pay off your loan if it is ever totaled. You can always check the reviews and services an insurer provides for your satisfaction. To aid you in choosing the one that suits your budget and needs, we have prepared the list of the best gap insurance companies for 2022. Let’s have a look.

Progressive

Progressive has a stellar reputation. Not only is its insurance affordable, but they provide coverage nationwide. Progressive is also known as loan/lease payoff insurance, and it has affordable GAP insurance policies. You may not believe it, but Progressive offers this type of insurance for just five additional dollars per month. Are you wondering how to add it with Progressive? You can choose to add the Progressive loan/lease payoff coverage to your policy or work directly with one of the company’s insurance agents.

AAA gap insurance

Do you wonder whether AAA sells gap insurance or not? Well, good luck to you because it sells gap insurance. You can purchase gap coverage through AAA’s auto financing department or an insurance policyholder. But this service varies by state. AAA’s gap insurance is affordable. Nevertheless, if you wish to purchase from AAA, you can choose a new car added protection endorsement; this is an add-on to policyholders with comprehensive coverage.

State farm

It is the biggest name in the car insurance industry in the United States. State Farm also provides gap insurance, and its gap option is also known as payoff protector car insurance. You have two options to purchase gap insurance from State Farm:

  1. You can choose State farm lending for car loan purposes. This choice will make you a happy customer. You can easily access your State Farm auto loan payoff amount through your account or by calling the State Farm payoff number.
  2. You can choose a State farm bank dealer service, which is accessible. Everything regarding this is available through their website in the most navigated manner.

Like other companies, the State Farm insurance’s totaled vehicle process only pays the actual cash value of your car. Adding State Farm’s option will help cover what you still owe on your loan. State Farm might not be the least expensive option, but the company has an excellent reputation. This may be why more people insure with them than any other company in the country.

These are the best three options to purchase gap insurance for cars. You may find cheaper options available in the market. Like a mindful buyer, you can also compare different quotes by different companies. According to Experian, some car insurance companies will adjust rates based on your credit score.

We will suggest you pay attention to the gap car insurance reviews from other customers to ensure the company you choose will be compatible with you. While many insurance companies offer it, the cheapest GAP car insurance quotes are not always the best option. Remember, good companies should not cost you an arm and a leg either. A car dealership may try to convince you to roll it into your loan, but this will be expensive, and most financial experts recommend against it.

Gap insurance on used car

Getting gap insurance on a used car is unusual; however, it is worth purchasing gap insurance if you take out a longer-term auto loan. Gap insurance can cost as little as $1.67/mo.can and covers 25% more than the actual cash value of your vehicle, so you do not pay out of pocket in the event of an accident.

It is essential to know if you should get gap insurance on a used car. GAP insurance is available on new and used cars. GAP insurance on a used car works the same way as a new car, although less common. Before you, let’s present an example of why you should purchase gap insurance for used cars.

Suppose you purchase a used car for $20,000, and after your first year of payments, you have a remaining loan amount of $17,500. In a total loss, your car’s actual cash value might be $15,000. You pay a $1,000 deductible, and the insurance company pays $14,000 because you have comprehensive coverage and collision coverage. This amount covers part of the loan balance, but you still owe $2,500, and that’s what your gap insurance pays.

Gap insurance for a used car: how to negotiate

The best negotiation tactics happen before you go to the dealership. It’s wise to pick up the phone and see what options are available. You should:

  • Know what vehicle you want, including year, make, and model.
  • Ask them what gap insurance products they sell.
  • Bargain them into revealing “dealer cost,” or the price where they make zero profit on the product.
  • Even if you are good at negotiating, the salesperson probably will not reveal the actual cost. If you get the number, the price will likely be higher than what you pay from a car insurance company or third-party gap insurance provider.

Gap insurance Cost

The cost of car insurance is highly personalized and varies from person to person. Car insurance companies weigh several factors when considering which rate to charge you, including your age, driving record, address, the type of car you drive, and more. Gap insurance typically costs $50 to $150 per year.

How much gap insurance will cost you depends on where you buy it. Gap insurance on a new or used car is much cheaper if you purchase it from a car insurance company. According to consumer advocacy groups, buying from a lender or dealership can be up to $1,000. According to Jimmi Lewis, owner of insurance brokerage Voi Insurance Solutions, in Glendale, Calif., near Los Angeles, “We always recommend this option, as adding gap insurance to your auto insurance policy will almost always save you at least 50% compared to purchasing at the dealership.”

Gap insurance refund

A gap insurance refund is a money-back that you receive for canceling your policy early, typically after repaying your loan. If you decide to drop gap insurance during a coverage term, you can apply for a refund. The insurer may not notify you that you are due a refund and possibly will not automatically reimburse you. In most cases, you will receive a refund of the unused amount of your coverage.

Some companies, including Navy Federal Credit Union and Bellwether Community Credit Union, give you the option to refund gap insurance if you do so within a specific time frame. You should be able to get a full refund if you cancel gap insurance within 30 days after the policy’s start date. The details depend on policy and state laws. Requesting a refund for gap insurance purchased from a car dealership will require following a few steps.

  • Review the terms of your policy to determine if the cost of gap insurance is part of your car’s financing. Contact the dealer, and request all the forms you need to cancel.
  • Know the mileage of your vehicle, and ensure that it is verified, to get a refund. Get an odometer disclosure statement from the dealer. You will use this form to verify the miles.
  • Contact the lender to request the forms you need to request a gap insurance refund for the part you did not use.
  • If you are getting rid of your car, do not cancel gap insurance until after completing the sale or trade. In some cases, you can contact the insurer directly. In other cases, the dealer can provide the proper forms you need.
  • When canceling gap insurance provided by a dealership, you will need to submit many things to the insurer. This includes the forms you need to cancel, the documents you need for a refund, the odometer disclosure statement, and the proof of sale if you are selling or trading the vehicle. If you drop the coverage after paying off your car loan, you may also need to submit a copy of the payoff letter. This letter should include details of the gap insurance balance.

How do you calculate a gap insurance refund?

You can do a simple calculation to determine how much money you are owed. Take the total cost of your gap insurance, and divide it by the number of months you had coverage. Then, multiply the monthly premium by the number of months you have left on your policy.

Here’s an example:

  • You paid $1,000 for a valid policy for 36 months.
  • Your gap insurance monthly payments would be about $27.
  • Imagine that you can repay your vehicle loan in full after just 20 months.
  • You could get a refund from your gap insurance provider for the 16 months that you no longer need gap insurance, which would equal roughly $444.

Can I buy stand-alone gap insurance?

Before you proceed to buy stand-alone gap insurance, you should know what stand-alone gap insurance is? If you purchase it from a company and nothing else, that’s considered a stand-alone policy. If you wonder who sells stand-alone coverage, it depends on where you live. A quick internet search will help you locate local agencies that offer this service. How do you know if they’re any good? It’s easy; reviews will help you decide.

For example, larger national companies, like Gap Direct, provide stand-alone policies. But Gap Direct reviews are low. Perform a price comparison and look at consumer reviews before choosing. If it is not easy to access a company’s number, that company probably is not the best resource. Remember, you are looking for the best car GAP insurance, which may or may not be a stand-alone policy. A new car insurance quote will never be the best option. Stand-alone providers offer you similarly bad deals.

Generally, the stand-alone GAP coverage fee is more than what your car insurance company would charge you if you added it to your policy. Similarly, your loan provider will usually charge a lower rate than what you will receive from a stand-alone company. For this reason, we highly recommend you compare quotes. A car insurance quote comparison will save you money and prevent future stress.

Gap insurance calculator

It is convenient to calculate your costs and premium with calculators available online. Just like for every other thing, you can find a gap insurance cost calculator as well. These calculators ask basic questions such as your age, gender, vehicle number, model, credit score, and liability coverage. Most insurance companies allow you to calculate gap insurance costs online through their calculators and compare quotes.

Without entering your personal information in various calculators, you can get a ballpark estimate of how much car insurance will cost. The estimators or calculators can help you decide if it is time to switch car insurance companies or find the right company that fits your needs and budget.

When does gap insurance not pay?

Gap Insurance does not pay out if your primary insurer rejects your claim. Here we are providing a few valid reasons when gap insurance does not payout:

  • Your primary motor insurer does not payout.
  • You do not have an ‘insurable risk’ on the vehicle.
  • The vehicle is being used for certain commercial activities.
  • You have stopped paying for the policy.
  • You sell the car or change ownership.
  • You have already claimed the gap policy.
  • Your gap insurance policy has come to its expiration.
  • You are not entirely comprehensively insured.
  • Costs for extended warranties, credit life insurance, or other insurance purchased with the loan or lease.
  • Carry-over balances from previous loans or leases.
  • Financial penalties imposed under a lease for excessive use.
  • The lessor does not refund security deposits.

Conclusion

Gap insurance protects you from any kind of loss that occurs on the road. It is an optional car insurance coverage that helps pay off your auto loan if your car is totaled or stolen and you owe more than the car’s depreciated value. Gap insurance may also be called “loan/lease gap coverage.” This type of coverage is only available if you are the original loan- or leaseholder on a new vehicle. Gap insurance helps pay the gap between the depreciated value of your car and what you still owe on the car.

You can purchase gap insurance for cars in addition to your collision and comprehensive car insurance. You can also get it from your car dealer but that will cost you some extra dollars as compared to any insurance company. Gap insurance weighs in a number of factors while estimating the cost of coverage, which varies from state to state. It is safe to purchase gap insurance, but there is no law that binds you to purchase it. It has its own pros and cons, therefore you must do your homework before you buy one for yourself.

Charles Bains

Charles Bains

Charles Bains started his insurance career as a marketing intern before pounding the pavement as a commercial lines agent in Orlando, FL. As an industry journalist, his articles have appeared in a variety of trade publications. His insurance television career, short-lived but glorious, once saw him serve as the expert adviser on an insurance-themed infomercial (yes, you read that correctly). Having recently worked for various organizations, coupled with his broader insurance knowledge, Charles is able to understand our client’s needs and guide them accordingly. He is a gem for Insurance Noon as his wide area of expertise and experience have been beneficial in conducting further researches to come up with solutions and writing them in a manner which is easy for everyone including beginners to comprehend.