Gap Insurance: Lease Necessity?

Gap insurance is an optional auto insurance coverage that applies if your car is stolen or deemed a total loss. It covers the difference between the depreciated value of your vehicle and the amount still owed on the loan or lease. While it is not required by any insurer or state, some lessors or leasing companies may require you to purchase it. Gap insurance is especially useful if you made a low down payment, have a long lease term, or are leasing a luxury car.

When is gap insurance required?

Gap insurance is required in certain situations where an individual is financing or leasing a vehicle. Here are some scenarios where gap insurance is typically required:

• Leasing a Vehicle: When leasing a car, gap insurance is often required by the leasing company or lessor. This is because leased vehicles typically depreciate quickly, and gap insurance protects the lessee and lessor financially in case of an accident or total loss.
• High Loan-to-Value Ratio: If you have a high loan-to-value ratio on your vehicle, meaning you owe more than the car's current value, gap insurance may be required. This situation is common when individuals put little money down on a vehicle or choose a long payoff period.
• Specific Vehicle Types: When financing certain types of vehicles, such as luxury cars, that are prone to faster depreciation, your lender may require gap insurance. This protects them if the vehicle is in an accident and the payout from standard insurance is less than the outstanding loan.
• Lease or Loan Agreement: In some cases, the terms of your lease or loan agreement may specifically require you to carry gap insurance. This is to protect both you and the leasing company or lender in case of a total loss.
• Small Down Payment: If you made a small down payment on your vehicle, gap insurance may be required. This is because a small down payment can result in you owing more than the car's value, creating a "gap" that needs to be covered.
• Long Finance or Lease Term: A long finance or lease term can increase the likelihood of gap insurance being required. This is because the longer the term, the more likely it is that you will owe more than the car's value at some point during the lease or loan period.

In summary, gap insurance is typically required when there is a risk of the vehicle owner owing more on their loan or lease than the actual value of the vehicle. This type of insurance protects both the owner and the lender or leasing company in case of an accident or total loss.

What does gap insurance cover?

Gap insurance covers the difference between the compensation you receive after a total loss of your vehicle and the amount you still owe on your car loan. This type of insurance is particularly useful if you have a long lease term, have made a low down payment, or are leasing a luxury car.

Gap insurance is an optional product that covers the difference between the amount you owe on your auto loan and the amount the insurance company pays if your car is stolen or declared a total loss. This typically happens when the cost of repairs would exceed the value of the car. In this case, your insurer will pay out a maximum of the car's actual cash value (ACV), which is an estimate of the car's retail value on the open market. If you still owe money on your car loan, gap insurance will cover the remaining payments.

Gap insurance does not cover costs related to vehicle repairs, personal injuries, or other accident-related expenses. It also does not cover theft. To cover these types of expenses, you will need to purchase additional policies such as liability insurance, uninsured motorist insurance, or personal injury protection (PIP).

The cost of gap insurance varies but is usually inexpensive. If added to a car insurance policy that includes collision and comprehensive insurance, it typically increases the premium by around $40 to $60 per year.

What does gap insurance not cover?

Gap insurance does not cover:

• Your car insurance deductible
• Overdue payments and late fees on your car loan or lease
• Extended warranties
• Carry-over balances from previous loans or leases
• Lease penalties for high mileage or excessive use
• Charges for credit insurance connected to the loan
• A down payment for a new car

Gap insurance also does not cover theft, engine failure, transmission failure, death, or your deductible. It is only applicable when your vehicle is declared a total loss, and won't pay out if your car is damaged but repairable.

Is gap insurance 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. It is a particular type of coverage used only when a new vehicle you've financed is totaled or stolen. It is fairly inexpensive and can be added to an existing policy.

Gap insurance is worth it in a few situations. You should consider getting it if:

• You made a small down payment
• You have a long finance period
• You leased a luxury car
• You're leasing a car
• You owe more on your auto loan than your car is worth
• You drive more than the average person in your area
• Your car depreciates faster than other cars

If you made a large down payment on your car, the amount you owe in car payments is unlikely to exceed your car's value, so you won't need gap insurance. You also won't need it if you expect to pay off your car loan in less than five years or if you've leased or financed a vehicle that holds its value longer than most.

How much does gap insurance cost?

The cost of gap insurance varies depending on where you purchase it. If you buy gap insurance from a dealership, it can cost hundreds of dollars a year, with a flat rate of $500 to $700 on average. On the other hand, 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.

If you purchase gap insurance from your regular auto insurer, the price is usually only $20 per year. However, if you buy a standalone gap insurance policy, you can expect to pay a one-time fee of $200 to $300.

The cost of gap insurance is also influenced by factors such as the vehicle's actual cash value (ACV) and the policyholder's auto insurance claims history.

Frequently asked questions