Gap insurance

Gap Insurance

What is Gap Insurance?

Gap insurance is a form of auto insurance coverage that covers car owners against losses resulting from a total loss. Whether the car is stolen or destroyed, comprehensive and collision insurance only covers the car’s value at the time of loss. A gap insurance policy protects car owners from potential losses if the amount of compensation they receive during a total loss isn’t enough to cover their final loan or lease balance.

How does gap insurance work?

For example, suppose your car is worth $20,000 when it is stolen, and you owe $25,000 on it. A comprehensive insurance policy will reimburse you for the value of the car at the time of the theft, which will be $20,000. To make a claim, you must first pay a deductible of $500. This means you will receive $19,500 from your insurance company but still owe $5,500 on your loan. The gap coverage can help fill this gap. Your gap insurance coverage will pay the final $5,500, so you aren’t left with any debt. Although gap insurance is an optional coverage, but your lender might require you to have it, especially if you lease your vehicle.

Is gap insurance worth it?

Whether your insured car is stolen or you have an accident that leaves it unrecoverable, you will receive a settlement from your company based on its actual cash value (ACV), not on its purchase price. Due to the quick depreciation of cars, you may not receive a settlement that will cover your remaining loan balance. Consequently, you could be left without a car and have a hefty loan to pay. If you are not capable of handling this situation, then gap coverage is a good idea!

When having a leased or financed vehicle, it is important to determine if you can afford to pay off the balance and the value of the car in the event of a total loss. People who don’t lease or have a car loan or whose car loan is paid below the value of their vehicle don’t need gap insurance.

How much is gap insurance?

Gap insurance is perhaps one of your considerations after buying a new car. Before buying this coverage, you will probably want to know, “How much will gap insurance cost?”  By understanding how much gap insurance costs and the factors affecting it, you can find the best gap insurance coverage at a great price.

The cost depends on where you bought it and other factors, such as the value of your car, where you live, and how old you are. Insurance companies charge about $20 to $30 per year for gap coverage when you bundle it with your comprehensive and collision coverage. On the other hand, the gap coverage cost varies depending on whether it is purchased through your regular auto insurance company, auto loan company, or standalone insurance. 

Comparing gap insurance quotes from several companies can help you figure out which companies, coverage plans, and rates are worth your time and money. American Family, StateFarm, AAA, Liberty Mutual, and Nationwide are some of the largest insurance companies that offer optional gap coverage as an addition to your car insurance policy.

Tip: The gap insurance is offered by many auto insurers as an add-on coverage to your existing policy. If you already have auto insurance, instead of buying gap coverage from the dealer, ask your insurer to add it to your policy. You’ll likely find this is the simplest option!

When does gap Coverage not pay?

Gap insurance coverage only covers the difference between a lease or loan balance and the car’s market value in case of total loss. As with all insurance policies, it should not surprise you to learn that gap coverage doesn’t always pay. A claim for any product must meet certain terms and conditions in order to be accepted and paid. 

Gap insurance won’t pay in the following circumstances:

  • When a car is not declared a total loss.
  • When there is no ‘gap’ between the settlement value and the original car price.
  • When a car gets damaged and needs regular repairs.
  • When your gap policy has expired.
  • When unemployment, injury, disability, or even death may cause a driver to default on payments.

Where can you get gap insurance?

Looking for gap insurance but don’t know where to purchase it? Here are three ways to get gap insurance:

  1. From your car dealer: 

Whether you are financing a car or leasing it, your dealer will surely ask you if you would like to purchase gap insurance. However, it is quite expensive to purchase gap insurance from a dealer. If you buy gap insurance from a dealer, the premiums may be bundled in the loan amount, so you will have to pay interest on the coverage.

  1. From your auto insurer: 

Gap insurance is widely available at a reasonable cost from your existing auto insurer. If you haven’t yet repaid your car loan or lease, you can add gap coverage to your auto insurance policy, and you won’t pay interest on your coverage. However, adding gap coverage to a car insurance policy is only possible if it includes collision and comprehensive coverage. 

  1. Standalone Insurance: 

You can also purchase gap insurance from an insurance company specializing in gap coverage, such as Gap Direct, or through another website. When you buy gap insurance as a standalone policy, the cost is usually higher than purchasing gap coverage as part of a car insurance policy or a loan company.

The Bottom Line

With cars depreciating quickly, the chances of an auto insurance settlement not covering what they owe on their lease or auto loan is relatively high. Neither comprehensive nor collision insurance pays for more than the vehicle is worth when stolen or damaged. 

Gap insurance is the only insurance that provides guaranteed asset protection to people who owe money on their cars. However, once your loan has been paid off enough to the point where your car is worth more than you owe, you can stop paying for gap coverage as it no longer makes sense to continue.

Would you like to learn more about gap insurance? Contact us through the comments section below, and we’ll be glad to explain it to you!

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