Gap Insurance: Post-Accident Steps

Gap insurance is an optional form of car insurance that covers the difference between the amount you owe on your car loan and the actual cash value of your vehicle if it is damaged or stolen. It is not required by any state, but it can be a valuable addition to your insurance policy if you owe more on your car than it is worth. Gap insurance will not cover the costs of repairs or personal injuries resulting from an accident. It is important to note that gap insurance must be purchased shortly after buying or leasing a new car, and it cannot be purchased after an accident.

What is gap insurance?

Gap insurance, or guaranteed asset protection, is an optional form of car insurance that covers the difference between the amount you owe on your car loan and the amount your insurance company pays out if your car is stolen or totaled. In other words, it helps to bridge the financial gap for drivers whose car loan balance is more than the value of their vehicle if it is stolen or totaled.

When you buy a new car, it starts to depreciate in value as soon as it leaves the car lot. Most cars lose 20% of their value within a year. Standard auto insurance policies cover the depreciated value of a car, meaning they pay the current market value of the vehicle at the time of a claim. If you've made only a small down payment on the car, in the early years of ownership, the amount you owe on the loan may exceed the market value of the vehicle.

If your car is stolen or totaled in an accident, gap insurance covers the difference between the current value of the vehicle (which your standard insurance will pay) and the amount you owe on the loan. This can be particularly important if you owe more to your lender than your vehicle is worth, as without gap insurance, you could continue making payments on a vehicle you can no longer drive.

Gap insurance is available from car dealers and insurers. It can be added to an existing insurance policy, or purchased as standalone coverage. It is usually cheaper to buy gap insurance from an insurance company than a car dealership. Some lenders or leasing companies require gap insurance to protect them from car owners who walk away from a loan or lease if the car is stolen or totaled.

When is gap insurance required?

Gap insurance is not a legal requirement, but it is a valuable form of coverage for certain drivers.

Gap insurance is required by some lenders and leasing companies, and it may be automatically added to your loan when you purchase a new car. However, you can decline this coverage. It is also not required in the state of Texas, and it can't be a condition of getting an auto loan or lease there.

Gap insurance is worth considering if you are in one of the following situations:

• You owe more on your car loan than the car is worth.
• Your car loan requires gap insurance.
• Your lease requires gap insurance.
• You made a small down payment.
• You have a long finance period.
• You purchased a vehicle that depreciates quickly.
• You rolled over negative equity from an old car loan into a new loan.

In general, most new car buyers benefit from gap coverage while the vehicle is less than three model years old.

When can you skip gap insurance?

Gap insurance is optional car insurance that covers the difference between the actual cash value of a vehicle and the amount still owed on a loan or lease in the event of a total loss. It is not required by any state, but it can be beneficial in certain situations. Here are some scenarios when you can skip purchasing gap insurance:

• Large Down Payment: If you made a substantial down payment on your vehicle, typically 20% or more, you may not need gap insurance. A large down payment reduces the risk of owing more than the car's value, even in the early years of ownership.
• Short Loan Term: When you plan to pay off your car loan in a short period, usually less than five years, gap insurance may not be necessary. The quicker you pay off the loan, the less likely you will be upside down on your loan, owing more than the car's value.
• Vehicle Holds its Value: If you own a vehicle that historically holds its value better than average, gap insurance may not be worth the extra cost. Some cars, like specific makes and models, tend to depreciate at a slower rate, reducing the risk of being upside down on your loan.
• Cash Purchase: If you buy your car outright with cash, gap insurance is unnecessary. Gap insurance is designed for situations where you owe more than the car's value, which does not apply if you own the vehicle free and clear.
• Adequate Savings: If you have sufficient savings to cover the gap between the car's value and the loan amount in the event of a total loss, you may forgo gap insurance. This scenario applies when you have enough financial cushion to absorb the potential difference without significant strain.

Remember, gap insurance is intended to protect you from owing more on your car loan or lease than the car's actual cash value. If you are confident that you won't find yourself in such a situation, either due to a large down payment, short loan term, vehicle value retention, or adequate savings, then you can consider skipping gap insurance.

How does gap insurance work?

Gap insurance, or guaranteed asset protection, is an optional form of auto insurance that covers the difference between the amount you owe on your auto loan and the amount your insurance company pays out if your car is stolen or deemed a total loss.

Gap insurance is intended to cover the loss you would suffer if your loan balance is higher than the value of your vehicle. It is called 'gap' insurance because it covers the 'gap' between the amount you receive as a payout from your insurance company and the amount you still owe on your car loan.

For example, if you owe $25,000 on your loan and your car is only worth $20,000, your gap coverage will cover the $5,000 gap, minus your deductible.

Gap insurance is available from car insurers and dealers, but it is usually cheaper to get it through your insurance company. You must have comprehensive and collision coverage on your policy to qualify for gap insurance.

Gap insurance doesn't cover other property or injuries resulting from an accident, nor does it cover engine failure or other repairs. It also doesn't cover your car payments if you suffer financial hardship, the value of a car that has been stolen or repossessed, loan balances that you roll over into a new loan, or extended warranty costs.

You can cancel gap insurance at any time. If you bought it through your car insurance company, you can contact them to cancel and will likely receive a pro-rated refund. However, if you bought gap insurance through a car dealership and the cost is rolled into your car loan, you may not be able to cancel it.

Is gap insurance worth it?

Gap insurance is a supplemental coverage that can be added to your comprehensive and collision coverages. It pays the difference between your car's actual cash value and the amount you currently owe on your loan or lease when your car is totaled in a traffic accident or stolen.

Gap insurance is worth considering if you owe more on your auto loan than your car is worth. This is especially true if you have a long loan term, made a small down payment, drive more than the average person in your area, or are leasing your car.

On the other hand, gap insurance may not be necessary if you made a substantial down payment, expect to pay off your car loan quickly, or have a vehicle that holds its value.

The cost of gap insurance depends on several factors, including the insurance provider, your credit score, the value of your vehicle, and how much you owe on your loan. It is generally inexpensive, costing around $20 to $40 per month or $61 per year on average.

When deciding whether to purchase gap insurance, it is important to weigh the potential benefits against the cost. It can provide valuable protection if you owe more than your car is worth, but it is an additional expense that may not be necessary for all drivers.

In conclusion, whether or not gap insurance is worth it depends on your individual circumstances. It can be a wise investment for those who are concerned about owing more than their car's value, but it may be unnecessary for those who have sufficient equity in their vehicle.

Frequently asked questions