Insuring The Uninsured: Strategies For Closing The Gap

Gap insurance is an optional type of insurance that covers the difference between the value of a car and the amount the driver owes on their loan or lease if the car is stolen or written off. This type of insurance is useful for those who have made a small down payment on a car, or who have a long-term loan. Gap insurance can be purchased from car insurance companies, loan providers, or dealerships, and typically costs between $20 and $40 per year when added to a car insurance policy, or between $400 and $700 when purchased from a dealership.

When leasing a car, gap insurance may be required

Gap insurance is especially useful if you made a low down payment, have a long lease term, or are leasing a luxury car. This is because these factors can contribute to a "gap" between what you owe on your lease and the current value of the car. For example, if your car is totaled in an accident or stolen, standard car insurance will only pay up to the car's current value, which may be less than the outstanding lease amount. In this case, gap insurance will cover the difference.

Some lessors may require you to purchase gap insurance for your leased vehicle. This helps provide financial security for both the lessee and lessor if the car is totaled or the lessee can't afford to pay the balance. Therefore, it is important to check your lease agreement to see if gap insurance is required.

Even if gap insurance is not required, it can still be beneficial to have. Leasing a car without gap insurance can be risky, as you may be held responsible for paying off the remaining lease balance if the car is totaled or stolen. Gap insurance can help protect you from this financial burden.

Overall, when leasing a car, gap insurance can provide valuable financial protection. It is important to consider the potential benefits and risks of going without gap insurance before making a decision.

Gap insurance is optional when financing a car purchase

Gap Insurance: Optional When Financing a Car Purchase

When you buy a new car, you may be offered gap insurance by the dealer or your auto insurance company. Gap insurance is optional if you're financing a purchase, but it might be required if you're leasing a vehicle.

Gap insurance is a supplemental auto policy that covers the difference between the insured current value of a vehicle and the balance of a loan or lease. In other words, it covers the "gap" between what you owe on your car and what it's worth.

If your car is stolen or involved in an accident and is declared a total loss, your auto insurance will pay you what the car is currently worth. However, if you owe more on your car loan than the car's current value, you will be left with a shortfall. This is where gap insurance comes in, as it covers this difference and ensures you don't have to pay out of pocket.

Gap insurance is particularly relevant if you put no money down on your car purchase and/or choose a long payoff period. In these cases, you may owe more than the car's current value.

Additionally, if you have an auto loan of $30,000 on a car worth $22,000, for example, you may not be able to afford to pay the $8,000 gap if your car is totalled. Gap insurance would cover this difference.

Other instances where gap insurance may be beneficial include:

• Making less than a 20% down payment
• Financing for 60 months or longer
• Leasing the vehicle (gap insurance is generally required for a lease)
• Purchasing a vehicle that depreciates faster than average
• Rolling over negative equity from an old car loan into the new loan

You may not need gap insurance if:

• You made a down payment of at least 20% on the car, so the chance of being upside down on your loan is minimal
• You're paying off the car loan in less than five years
• Your vehicle is a make and model that historically holds its value better than average

How to Get Gap Insurance

You can typically add gap coverage to an existing car insurance policy or purchase it as a new policy, as long as your loan or lease hasn't been paid off. Buying gap insurance from an insurance company is usually less expensive than getting it from a dealer, as the latter may bundle the cost of coverage into your loan amount, resulting in interest payments on your gap coverage.

Additionally, some auto lease deals include gap coverage in their pricing. It is recommended to check with your auto insurance company to see if they can add gap insurance to your existing policy.

You should cancel your gap insurance policy when you owe less than your vehicle is worth, which usually takes about two years. You can compare how much you owe on your loan with online car value guides, such as the National Automobile Dealers Association (NADA) guide or Kelley Blue Book.

If you pay off your loan early or sell the vehicle, be sure to cancel the policy.

Gap insurance is worth it if you owe more on your car than it's worth

Gap insurance is a type of coverage that is used when a new vehicle that has been financed is either stolen or totaled. It is worth getting gap insurance if you owe more on your car than its worth. This is because, in the event of theft or a total loss, your insurance company will pay the actual cash value (ACV) of your car, which may be less than what you owe on your loan. Gap insurance covers the difference, so you don't have to pay out of pocket.

Gap insurance is worth it if you:

• Owe more on your auto loan than your car is worth.
• Made a small down payment or put nothing down for your new car.
• Took out a loan with a term longer than two years.
• Drive more than the average person in your area.
• Are leasing your car.
• Own a car that depreciates faster than other cars.

You may not need gap insurance if:

• You made a down payment of at least 20% of the car's value at the time of purchase.
• You expect to pay off your car loan in less than five years.
• You financed or leased a vehicle that holds its value longer than most.

You can purchase gap insurance through your insurance provider as an add-on coverage, through an insurance company that provides gap insurance for a one-time fee, or your dealership or lender may provide gap insurance through your loan payments. Gap insurance is typically cheaper to add to an existing policy than to buy from a dealer.

Gap insurance is not worth it if you've paid off most of your loan

Gap insurance is an optional auto insurance coverage that applies if your car is stolen or deemed a total loss. It is designed to cover the difference between the compensation you receive after a total loss of your vehicle and the amount you still owe on a car loan.

• You made a down payment of at least 20% on the car when you bought it.
• You're paying off the car loan in less than five years.
• The vehicle is a make and model that historically holds its value better than average.

Additionally, gap insurance is typically not needed if you are not financing or leasing your car. If you own your car outright, there is no loan to worry about, and gap insurance would not provide any additional benefit.

Overall, whether or not gap insurance is worth it depends on your individual circumstances, including the amount you owe on your loan, the value of your car, and your financial situation. It is important to carefully consider your needs and assess the potential value of gap insurance before deciding if it is worth it for you.

You can buy gap insurance from a dealership or an insurance company

If you're buying or leasing a new car, you can get gap insurance from a dealership or your auto insurance company. Usually, gap insurance is optional if you're financing a purchase, but it might not be optional if you're leasing a vehicle.

Buying gap insurance from a dealership

When you buy or lease a car, the dealer will likely ask if you want to purchase gap insurance when you discuss your financing options. Buying gap insurance from a dealer can be more expensive if the cost of the coverage is bundled into your loan amount, which means you'd be paying interest on your gap coverage.

Buying gap insurance from an insurance company

You can typically add gap coverage to an existing car insurance policy or a new policy, as long as your loan or lease hasn't been paid off. Buying gap insurance from an insurance company may be less expensive, and you won't pay interest on your coverage. If you already have car insurance, you can check with your current insurer to determine how much it would cost to add gap coverage to your existing policy. Note that you need comprehensive and collision coverage in order to add gap coverage to a car insurance policy.

Gap insurance makes sense for people who put no money down and choose a long payoff period since they may owe more than the car's current value.

You may be able to skip gap insurance if you made a down payment of at least 20% on the car when you bought it, or if you’re paying off the car loan in less than five years.

Your policy won’t pay the cost of replacing the car with a brand-new vehicle. You’ll be reimbursed for what a car comparable to yours would sell for on a used-car lot. Insurers call this the vehicle’s actual cash value. Since payouts are based on actual cash value, not replacement value, gap insurance can help to minimize your financial losses.

Gap insurance costs an average of $61 a year, according to Forbes Advisor’s analysis.

Gap insurance is much cheaper through a car insurance company compared to a car dealership. Buying gap insurance from a car dealership might seem convenient, but it can often end up costing you more in the long run. Car dealerships typically charge up to $600 for gap insurance that can be added to your loan, according to Trusted Choice, a group of independent insurance agents.

Frequently asked questions