Gap Insurance: Opt-In Or Automatic?

Gap insurance is an optional, additional coverage that can be added to your car insurance policy. It covers the difference between the amount owed on a car loan or lease and the amount paid out in a total loss settlement from an auto insurer. In other words, it bridges the gap between what your vehicle is worth and how much you owe on your car at the time it's stolen or totaled. This type of insurance is particularly useful if you have a long loan payoff period or if you've made a small down payment on your vehicle, as it can protect you from owing more than your car is worth in the event of an accident.

Gap insurance is not required by law

Gap insurance, or guaranteed asset protection, covers the difference between the amount you owe on your car loan or lease and the current market value of your vehicle if it is stolen or totaled. This type of coverage is useful if you owe more on your car than it is worth, as standard auto insurance policies will only cover the depreciated value of the car.

When deciding whether to purchase gap insurance, consider the following:

• The amount you owe on your car loan or lease. If you owe significantly more than the car's value, gap insurance can provide valuable protection.
• The value of your car. Online pricing guides can help you determine the current market value of your vehicle.
• Your ability to pay off the difference between the amount you owe and the car's value in the event of a total loss. If you cannot afford to cover this gap, gap insurance may be a wise investment.
• The length of your financing term. Longer financing terms increase the likelihood of owing more on your vehicle than it is worth.
• The depreciation rate of your car. Some vehicles depreciate faster than others, and gap insurance can help protect against this.

While gap insurance is not legally required, it can provide financial peace of mind and protect you from significant expenses in the event of a total loss. Be sure to review your auto insurance policy and loan or lease agreement to understand your specific needs and requirements.

It is optional and covers the difference between the value of a car and the loan amount

Gap insurance is an optional form of coverage that is designed to cover the difference between the value of a car and the amount owed on a loan or lease in the event of a total loss. This type of insurance is particularly useful for those who have made a small down payment, have a long payoff period, or have rolled over negative equity from an old car loan.

When a car is declared a total loss, standard car insurance policies will only cover the current market value of the vehicle. This can leave a significant gap between the amount paid out by insurance and the amount still owed on the loan or lease. Gap insurance is designed to bridge this gap, ensuring that the full amount owed on the vehicle is covered.

For example, let's say you owe $20,000 on your car loan, but due to depreciation, your car's actual cash value is only $15,000. If your car is completely written off in an accident or due to theft, your standard insurance policy will only pay out $15,000. With gap insurance, the remaining $5,000 would be covered, ensuring you don't have to pay out of pocket to cover the remaining loan amount.

Gap insurance is typically purchased from car insurers or dealers and can be added to an existing car insurance policy. It is important to note that gap insurance does not cover other property or injury damages resulting from an accident, nor does it cover engine failure or other repairs. Additionally, it is not required by any insurer or state, but some leasing companies or lenders may require it.

In summary, gap insurance is a valuable form of coverage for those who owe more on their car than its current value, helping to protect against financial losses in the event of a total loss. By covering the "gap" between the insurance payout and the loan or lease amount, gap insurance provides peace of mind and financial protection for drivers.

It is useful if you have a long loan payoff period

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 what your vehicle is worth and how much you owe on your car loan at the time of the incident. This type of insurance is particularly useful if you have a long loan payoff period because it can protect you from the financial burden of depreciation.

When you buy a new car, it starts to depreciate in value immediately, and most cars lose 20% of their value within the first year. If you have a long loan payoff period, this means that for a significant portion of your loan term, you could owe more on your car than it is actually worth. In the event that your car is stolen or totalled during this time, gap insurance would cover the difference.

For example, let's say you owe $30,000 on a new car. Unfortunately, within the first year, its value has dropped to $25,000. If your car is then stolen or totalled in an accident, your comprehensive insurance will only pay out the value of the car at the time of the incident, minus your deductible. This would leave you with a $5,000 gap, which you would be responsible for paying. However, if you have gap insurance, it will cover this difference, so you don't have to pay off this amount.

Having a long loan payoff period increases the likelihood of owing more on your car than it is worth, so it is generally recommended to consider gap insurance in this situation. It can provide financial peace of mind and protect you from having to pay off a significant amount in the event of a total loss.

However, it's important to note that gap insurance is not required and may not be necessary for everyone. It is an additional cost, typically added to your annual premium, and there are other factors to consider when deciding if it is right for you. These factors include the length of your loan term, the size of your down payment, and the rate of depreciation of your vehicle.

It is not needed if you have made a large down payment on the car

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 what your vehicle is worth and how much you owe on your car loan at the time of the incident. However, if you have made a large down payment on your car, you may not need gap insurance.

A large down payment reduces the amount of money you need to borrow and, consequently, the interest you pay over the life of the car loan. Experts generally recommend a down payment of at least 20% of the car's value. A larger down payment can also lower your monthly payments, increase your equity from the start, and reduce the chances of becoming upside down on your loan.

Upside down on a loan, or having negative equity, means that you owe more money than the car is worth. This can happen when a car's value depreciates faster than the loan balance decreases. A larger down payment acts as a buffer against depreciation, reducing the likelihood of negative equity.

If you have made a large down payment and have positive equity in your car, you may not need gap insurance. Gap insurance is intended to protect against the financial burden of negative equity in the event of a total loss or vehicle theft. Without gap insurance, you would be responsible for paying off the remaining loan balance if your car is stolen or totalled, even after receiving an insurance payout. However, if your down payment is large enough that you owe less than the car's value, you may not need this additional protection.

It is important to note that gap insurance is optional and not required by any insurer or state. When deciding whether to purchase gap insurance, consider your down payment amount, the car's value, and your financial situation. Consult with your insurance provider and review your policy to make an informed decision about whether gap insurance is necessary for your specific circumstances.

It is available from car dealers and insurers

Gap insurance is available from car dealers and insurers. When you buy a new car, the dealer will likely offer you gap insurance when you discuss your financing options. However, it is usually more expensive to buy gap insurance from a dealer because the cost of the coverage is bundled into your loan amount, which means you pay interest on your gap coverage.

On the other hand, buying gap insurance from an insurer is typically less expensive, and you won't pay interest on your coverage. You can usually add gap coverage to an existing car insurance policy or a new policy, provided your loan or lease hasn't been paid off. If you already have car insurance, check with your current insurer to determine the cost of adding gap coverage to your existing policy. Note that you need comprehensive and collision coverage to add gap coverage to a car insurance policy.

Some of the largest insurance companies that offer stand-alone gap insurance or its equivalent as add-ons to car insurance policies include Allstate, Progressive, and USAA. Progressive, for example, offers loan/lease payoff coverage, which is similar to gap coverage, with the main difference being that the payout is limited to no more than 25% of the vehicle's value.

Frequently asked questions