What Is Gap Insurance and Is Coverage Worth It?

Gap insurance Is an optional auto insurance coverage that helps pay your car loan if your car is lost or stolen and you owe more than the vehicle is worth

 

What Does Gap Insurance Cover?

Gap insurance comes into play if your vehicle is financed and you make a total loss claim — either after your vehicle is totaled (the cost of the repairs would be more than the car is worth) or if it is stolen. When you submit a total loss claim, your insurer will pay a maximum of the actual cash value of your vehicle (ACV).

In some cases, the amount you still owe in car payments can exceed your car’s ACV. This is known as having negative equity or being upside down on your loan. Gap insurance, also sometimes called loan/lease payoff insurance, helps you pay off the loan in this situation. Remember, the loan doesn’t go away just because your car is totaled.

How Does Gap Insurance Work?

Consider the following example: Your vehicle is financed and you still owe $10,000 to your lender. You are involved in an accident, and the car is declared a total loss. The insurance claims adjuster determines that your car’s ACV is $8,000, and your insurer issues a check for this amount. Gap insurance covers the remaining $2,000 to pay off your auto loan balance.

Do You Need Gap Insurance Coverage?

If your vehicle is not financed, there is no reason to purchase gap coverage. If you do finance your vehicle, gap coverage can be a good idea, but it depends on how much you drive and how quickly your car depreciates. Keep in mind that cars can depreciate rapidly. According to the Insurance Information Institute, many vehicles depreciate 20% or more within the first year of ownership.

Is Gap Insurance Worth It?

If you are not financing or leasing your car, there is no reason to purchase gap insurance. But gap coverage can be worth it in a few situations. You should consider gap insurance coverage if:

  • You made a small down payment
  • You have a long finance period
  • You drive a lot
  • You purchased a vehicle that depreciates quickly

To calculate the potential value of gap insurance for yourself:

  1. Use Kelley Blue Book to estimate your car’s value. You may want to also estimate what your car’s value will be after each year of ownership until your car loan is fully paid.
  2. Review your loan terms. Check how much you will still owe in payments after each year of ownership and compare this against your car’s estimated value at that time.
  3. Calculate how much you will pay in gap coverage during those years.
  4. Compare your results. The difference between your car’s value and the amount you will owe in payments is the amount that gap coverage protects you from potentially having to pay.

How Much Does Gap Insurance Cost?

The cost of gap insurance can vary but is usually inexpensive. If you buy gap insurance from the dealership, it can cost hundreds of dollars a year. If you add gap coverage to a car insurance policy that already includes collision and comprehensive insurance, it typically increases your premium by around $40 to $60 per year.

How Is Gap Insurance Calculated?

Lenders and dealers calculate what you pay for gap insurance based on your loan and your vehicle’s expected depreciation. Gap insurance can be more expensive for larger loans. Car insurance companies calculate your gap insurance cost based on your vehicle and your driving profile. 

Does Gap Coverage Always Pay Out?

Gap insurance only pays out if the total loss claim is approved and the settlement you receive for your vehicle doesn’t cover your outstanding loan amount. If another driver was at fault, gap insurance can cover the difference between their insurance company’s settlement offer and the outstanding loan, as well. 

When Does Gap Insurance Not Pay?

Some gap insurance policies limit the total amount you can receive. For example, Progressive’s gap insurance policy covers up to 25% of the vehicle’s ACV. It’s possible this gap payout wouldn’t cover the whole loan if your car had depreciated significantly.

Gap insurance wouldn’t pay out if your car was damaged but it wasn’t declared a total loss. Also, the insurance company can decline payments if you haven’t paid your own insurance premium.

Where To Buy Gap Insurance

You can get gap insurance from most major car insurance companies, though not all offer it. You can also get gap coverage from your dealership or auto lender when you purchase the vehicle. However, you’ll pay slightly more this way because the cost is added to your auto loan payments with interest.

Be aware that insurance companies only sell gap coverage as an add-on to an existing policy. In other words, you can’t have a Progressive policy and get State Farm gap insurance.

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