Everything You Need to Know About Gap Insurance
What is Gap Insurance?
Everyone who owns, leases, or drives a car should have the protection of auto insurance. But, sometimes the comprehensive, liability, or collision coverage they have isn’t enough to cover their costs after a claim.
In that kind of situation, the insurance company may pay out money for the claim, but the policyholder would still be left holding a bill for the accident.
That’s where gap insurance comes in. “Gap” actually stands for “Guaranteed Auto Protection.” It covers the car owner from a total loss that isn’t fully reimbursed by their traditional policy.
While gap insurance doesn’t stand on its own, many people find it useful to insure vehicles they lease or when they owe a considerable amount through a car loan.
Imagine that there’s a car accident that totals your vehicle before you’ve finished paying it off. Your car insurance may not pay the amount you owe or enough to pay for a replacement. This situation could also play out when your car is stolen.
No matter how you take a total loss on your vehicle, gap insurance can be helpful to protect you from big, future vehicle expenses. It’s there to close the divide between an initial claim payment and the true loss amount.
How Does Gap Insurance Work?
Understanding gap insurance and the need for it means revealing a simple idea: there is a difference between the value of your car and the price you pay for it. Car insurance claims look at the value of your car when deciding what they pay in the event of an accident and total loss. For drivers, this translates to the risk of never recovering what they paid for their car because cars lose value just a few weeks after they’re bought.
Gap Insurance Example
When a car that was paid for through a loan or lease at a higher price than it is currently worth, the auto insurance policy won’t pay out the cost of a brand new vehicle.
Instead, the insurer will write a check for the amount someone might pay for your car today. While gap insurance isn’t designed to cover the amount that the initial claim payment will shell out every time, it will help when your insurance pays less than what you still owe:
- If you buy a car with a loan of $22,400, you’ll make payments every month. With a $200 payment for 12 months, you’ll bring your car loan down to $20,000 (without interest).
- Then, let’s say that you get into an accident or someone hits your car that results in a totaled vehicle.
- After you make a claim for the car, you can’t expect the insurer to pay the full $22,400 you paid, but they do estimate the current worth at $18,000.
Without gap insurance, that leaves you owing $2,000 (since you owed $20,000 after your year of payments). You won’t have any claim dollars to finance a new car, and you still haven’t closed the first loan. This is a really unfortunate situation that some drivers find themselves in.
With gap insurance, you can settle the loan with an additional $2,000 insurance payment (in this example) and still be able to move on with finding a new car. Since there’s a difference between what the car’s value is (according to the car insurance company) and the amount you may have taken a loan for, gap insurance may cover the difference.
What Does Gap Insurance Cover?
Many drivers owe more on their car than the car is presently worth because of interest rates and how cars decrease in value (commonly referred to as depreciation) over time. Since car insurance typically only covers what the car is worth on the day of the accident (or theft), many people are attracted to gap insurance and its potential to balance out how much they owe on their auto loan with what the insurance company will pay.
But, gap insurance won’t pay the difference in every case. For example, if you simply paid more for the car outright than the car is worth in present value according to the insurer, then gap insurance doesn’t cover it. Car insurance, traditionally, pays what the car is worth now rather than what you may have paid for it.
However, if you owe more on your car than what it’s currently worth (commonly referred to as “negative equity”), then gap insurance may step in to settle the difference in the event of a total loss or theft.
If you want help with the difference, try Compare.com and get the lowest gap insurance quotes.
Do You Need Gap Insurance?
Gap insurance helps drivers escape the situation where they owe more on a car than they can receive after an insurance claim. It’s a good idea to buy gap insurance on a new vehicle in many situations, but especially when you finance, lease, and borrow:
- Small Down Payment. If you made a small down payment or took advantage of a “zero down payment” offer, then it’s likely that you already owe more than the car is worth. Without cutting the loan amount with a down payment, the car depreciates below what you owe fast. Some say it happens as soon as you leave the lot.
- Long Loan Terms. If, for example, you choose a car loan of 60, 72, or even 84 months, the loan will leave you with more interest costs. Even as the car loses value, your loan will grow. You run the risk of being stuck with that difference if something should happen that renders the car damaged beyond repair.
- Leasing Requirements. In some cases, gap insurance is a requirement of leasing options on new cars to cover the difference between your car’s worth and the lease balance. However, gap insurance may be included as part of your lease agreement. Though some offer the gap insurance as a free add-on, you can also get it as a feature for an additional fee.
- Value-losing Vehicle. Some cars lose their value at greater speed than other models. Newer cars, for example, tend to drop in value quickly, and certain models or makes will give you a steeper depreciation rate on your car’s value according to insurers.
- High Mileage Usage. As you put miles on your car, the car loses value. So, if you plan to drive extensively—more than the annual 13,000-mile American average every year—gap insurance may be an especially good choice to protect yourself from having to cover the negative equity out of pocket.
If you’re worried that your car may have a value less than what you currently owe, you can check Kelley Blue Book and other sites for more information before you shop for cheap gap insurance quotes.
How Much Does Gap Insurance Cost?
In some cases, you could pay just $20 per year for gap insurance coverage, but you’ll have to look at a rate from each specific car insurance company for your particular situation and car. The company will look at all kinds of insurance factors to calculate your rate such as your age, gender, record, location, and more.
In general, you can expect gap insurance to change based on your current collision and comprehensive coverage premium. Usually, gap insurance becomes a percentage (around 5%) of the total. For many, that means that if you pay $1,200 every year for car insurance coverage, then you’ll pay around $60 more per year.
If you’re looking for the cheapest option, it’s usually best to get gap insurance from your current or future auto insurance company instead of the car dealer or loan provider. Those last two will charge you higher rates on average.
Is Gap Insurance Worth it?
Gap insurance can be essential for those who owe more on their car than the car’s actual cash value. When there’s the risk that you could be caught having to pay off your car loan after your car’s totaled or stolen, you only stand to benefit from having insurance that will take the burden off and free you up to buy a new car faster.
If you put a small down payment or took advantage of a promotional offer, gap insurance pays the difference between what your loan amount is and how much your car is really worth. This is even more true if you chose a longer term on the loan or lease to get a lower monthly payment since you face more interest. The same applies to people who chose no down payment or even a low down payment when they purchased their vehicle new.
Gap insurance is also valuable to people who buy newer cars that lose 10% of their value within the first year. Along those same lines, the insurance is suited to people who speed up the loss of car value by driving their cars over the expected 13,000-mile national average.
So, even if your leasing dealership doesn’t require it, shop for low-cost gap insurance if any of these situations apply to you.
Gap Insurance Pros and Cons
Cars are expensive, and few people would ever think about insuring that car for less than it’s worth—at least at the start. However, since cars lose value quickly (even as they are driven away after the purchase), gap insurance seems just as necessary to many drivers. Still, it’s not always clear if the benefits of gap insurance outweigh the costs.
A primary benefit to gap insurance is that it’s adapted to the current way cars are purchased. The average car loan in the United States is over $30,000, and it makes sense that an owner’s loan balance stays higher than the value of the car in the eyes of an insurer. That’s one reason a driver will supplement their collision insurance with a gap policy, but they also consider the price.
Gap car insurance doesn’t add much to your current premium since it’s usually a small percentage of the usual amount. Many policyholders pay just 5% more for gap insurance that can stop a totaled vehicle or theft from leaving them a big bill and no car. But, even though gap insurance doesn’t cost much, its applications are limited.
Gap insurance—despite the name—doesn’t settle the difference between what the insurance company will pay on a claim and the real price you paid for the car. Instead, it settles the difference between the insurance payment and what you owe. Those seeking this protection should know that going in.
What Companies Offer Gap Insurance?
Gap policies are a popular add-on for drivers concerned about the possibility of a new car getting totaled or stolen. Because of this, many major car insurance companies offer attractive policies:
- Progressive. Through “Loan and Lease” Payoff policies, Progressive will cover up to 25% of the cash value of your car in the event the gap insurance has to kick in.
- Allstate. Covering cars up to $100,000 in value, Allstate will cover up to $50,000 in the difference between the car value and what’s owed.
- Nationwide. Like many others, Nationwide offers gap insurance with a partial insurance deductible after a total loss or when your vehicle might be stolen.
Many other car insurance companies offer gap insurance, so if you find a company you like for your traditional collision and comprehensive insurance, ask about gap coverage as well.
Where Can You Buy Gap Insurance?
Your gap insurance policy is usually added to your existing comprehensive and collision coverage, so you can buy it with your traditional car insurance policy and chosen insurance company. Even if you haven’t included it in your policy, you might be able to apply for gap coverage under the same policy if you buy a new vehicle.
You can also buy gap insurance directly from the car dealership where you finance a new car. It’s usually the most expensive option, but it can work because your existing insurance company might have restrictions that mean you can’t get the policy type otherwise. Your car loan lender might have options as well.
Wherever you choose to find gap coverage, be aware that not every insurer is the same. They have unique conditions and ask for different rates depending on their review of your application. Search for the lowest gap insurance quotes, and find an insurer with enough financial protection options to fit your needs.
Frequently Asked Questions
How is gap insurance calculated?
Gap insurance premiums are variable, but they are usually based on a percentage since most drivers purchase the policy as part of a larger insurance package. For example, an insurer might charge 5% of your yearly premium: if you normally pay $1,000 every year for car insurance, you’d pay $1,050 instead to include gap coverage.
How long is gap insurance for?
Different car insurance companies have different requirements, but because of the nature of this type of policy, most people only need it for a few years. Gap policies cover the difference between your loan or lease amount and the actual value of your car that the insurance company will pay after it’s totaled or stolen. Because of this, having the insurance for more than a few years might not make sense if the difference is small or if the car’s value is more than the loan you’ve been working to pay off. That’s also why many insurers require the car to be a certain number of years since manufacturing and sometimes limit policy terms.
Do you need gap insurance if you have full coverage?
Full coverage doesn’t necessarily include gap insurance, but some insurers will include gap coverage in the package. Instead, gap policies serve a special function to cover the difference between what an insurance company will pay for a totaled or stolen car and what the car loan or lease amount is. Full coverage will only pay the present value of the car, which could very well be lower than the amount you still owe. Gap coverage is an add-on policy that you can seek out if your insurance company didn’t already suggest and include it.
Should you buy gap insurance from the dealer?
You can very easily buy gap coverage from a dealer if you realize that you’re likely to pay quite a bit more for it than you would with a traditional insurance company. You’ll generally get a much better deal from your normal insurance company.
Can you buy gap insurance on your own?
Some specialty insurers will let you buy gap insurance on your own at any time before you can pay off your lease or loan. Most traditional insurance companies will sell it only when you purchase a new car, but there are exceptions. Though you can buy a standalone policy as well, it’s more typical for policyholders to simply add it to their existing car insurance.