If you’ve ever heard the term ‘gap insurance’ and wondered what exactly it is, you’ve come to the right place. We’re here to answer all of your most common questions about gap insurance, including:
- What is gap insurance?
- What does gap insurance cover?
- Do I need gap insurance?
- Can you get gap insurance after you’ve bought the car?
- Should I get gap insurance?
- What does gap insurance not cover?
- What does gap insurance cost?
Gap insurance is an optional type of coverage that can be applied to your policy. It’s designed to account for the difference between what you owe on your car and its actual value. If you owe more on your car’s loan or lease than the car is actually worth, gap coverage can help make up the difference in the event that your car is totaled or stolen.
Generally, gap insurance is only an option if you are the original person to hold a loan or lease on a new vehicle. Its name comes from the fact that it covers the ‘gap’ between what you owe and what your vehicle is worth.
What Does Gap Insurance Cover?
Let’s say that you have a car loan for $20,000 that’s covered by an insurance policy. One day you’re driving the car and get into an accident, which results in the car being ‘totaled.’ (Note: This simply means that your insurance provider considers the vehicle a total loss and will replace it rather than have it repaired.)
However, even though you owe $20,000 on the car, it may only be worth $17,000. Your standard insurance will only pay the amount of the car’s actual value, not what you owe on the loan.
You’ll notice that there’s a ‘gap’ of $3,000. Without gap insurance, you’ll be personally on the hook for this difference. With gap insurance, your insurance company will also cover that difference in cost.
It should be noted that whether or not you’ll still have to pay your deductible depends on the insurance company and the type of gap coverage you purchase.
Do I Need Gap Insurance?
Gap insurance is not required by any state laws or other legal requirements. However, there may be specific instances when you may be required to purchase gap coverage by another party. Some lease agreements, for example, require gap coverage to be purchased at the time of the lease. Always make sure to ask a lender whether gap coverage is required. It’s still relatively rare for it to be required as a term of a lease or loan agreement.
Can You Get Gap Insurance After You’ve Bought the Car?
Depending on the model year of whatever vehicle you purchased, and your individual insurance provider, you may be able to purchase gap insurance coverage after you’ve purchased the car.
While gap insurance is often sold by car dealerships themselves, many insurance providers will also offer it. In these cases, gap insurance can be purchased after the fact just like any other optional insurance coverage. That said, many insurers will require that your car has been purchased brand-new and that you are the original owner, and may also require it to be less than a certain age (usually 2-3 model years).
Should I Get Gap Insurance?
While the decision of whether or not to purchase gap coverage is up to you, there are some circumstances that may make it a wise choice.
Here are a few situations that might make gap insurance worthwhile:
Your loan term is long.
If you choose a long loan term for your vehicle loan, you’re likely to become what’s known as ‘upside down’ on the loan. That means that because you’re paying lower monthly payments, your car is likely to depreciate in value faster than the rate of your loan being paid off. Generally, gap insurance can be recommended for people who have selected a long term that’s 60 months or longer. That said, this can be dependent on many other factors, so just because you have a 48-month loan or shorter doesn’t mean you automatically don’t need gap insurance.
Your down payment was small
Similar to long loan terms, small or nonexistent down payments can result in you becoming upside down on the loan and finding that the car is worth less than what you owe on it. This is another reason to purchase gap insurance. In the event of a total, your insurance company will only pay for the car’s value. Gap insurance can protect you in this instance.
Remember, new cars lose their value extremely fast. Many experts estimate that a brand-new car will have lost over a quarter of its value by the end of its first year of driving. That could quickly leave you with a significant gap between its value and what you owe on the loan.
The make and model of your car will depreciate fast.
Not all cars are created equal. Some hold their value incredibly well; some begin bleeding value as soon as you drive them off the lot. A wide range of factors go into this, but you should do your research to determine whether your car is one that will lose value quickly or will hold its value a bit better than average.
The car is a lease
If you leased your car rather than financing it with an auto loan, then gap insurance might actually be required in your agreement. Sometimes it’s free, sometimes it’s required but has an added cost, and in other cases it will simply be available as an option for an additional cost based on your preference. You should do your research and ask the dealership how gap insurance works for your lease.
You drive more than the average person
The more you drive a vehicle, the faster it depreciates. If you are going to be using your car heavily and racking up miles, it will be losing value faster and is more likely to result in a gap between its value and what you owe on it. If you’re a heavy driver and don’t think your car loan will keep up with you as a car owner, then you might want to consider gap coverage.
What Does Gap Insurance Not Cover?
Gap insurance doesn’t cover your car payments if you lose your main source of income, and it doesn’t cover general repairs to your vehicle. It also won’t cover a rental car while your vehicle is being repaired, or the costs of any extended warranties. It only covers the difference between your car’s value and what you owe on it.
What Does Gap Insurance Cost?
The average cost of gap insurance when purchased from your insurance company is around $20 to $50 per year, depending on the value of the vehicle and other specifics.
While how much your gap insurance will cost can vary widely, there is one thing that’s consistent— it will cost much more if you buy it from your dealership or financing bank than it will if you buy it from your insurance company. The average cost of gap insurance when purchased from a dealership is as high as $60/ month, or $700 a year.
Conclusion
Overall, gap insurance can be a great way to ensure you’re not on the hook for the difference between your car’s value and what you owe on it in the event of an accident. It’s often not required, but should be considered before making a decision about your policy. Make sure you understand what costs you’re liable for when it comes to returning a leased vehicle or selling a vehicle you own, as this information will help determine whether you should purchase gap coverage for the vehicle.
Want to find cheap car insurance quotes online? Head to Freedom National to find out more. You can also check out our blog to learn even more about car insurance, from regulations in your area to the best ways to save on your premiums.
