Gap Insurance: New Car Essential?

Gap insurance is an optional form of coverage that can help bridge the financial gap for drivers whose car loan balance is more than the vehicle's worth if it's stolen or written off. It covers the difference between what you owe on your car and what it's worth, and you might need it if your car is worth less than what you owe on your car loan.

Gap insurance is worth considering if you've made a small down payment, have a long finance period, or have purchased a vehicle that depreciates quickly. It's also worth noting that gap insurance is only necessary if you're financing or leasing a vehicle – if you fully own your car, there's no need for gap insurance.

What is gap insurance?

Gap insurance, or guaranteed auto protection, is an optional auto insurance coverage that can be purchased to protect against financial loss in the event of a car being written off or stolen. It covers the difference between the depreciated value of the car and the loan amount owed.

When a car is written off, standard car insurance will only pay up to the current value of the car, which may be less than the outstanding loan or lease amount. Gap insurance covers this difference, ensuring the owner does not suffer any financial loss. This type of insurance is particularly useful for those who have not made a down payment on their car or who have chosen a long payoff period, as they may owe more than the car's current value.

Gap insurance is not necessary for those who have made a substantial down payment on their car or who are paying off their loan in a short period, as they are less likely to owe more than the car's value. It is also not required for cars that are not financed or leased.

The cost of gap insurance varies but is generally inexpensive, with an average cost of around $61 a year according to Forbes Advisor. It can be purchased from car insurance companies, banks, credit unions, or car dealerships, although the latter option is typically more expensive.

When do you need gap insurance?

Gap insurance is an optional coverage that pays the difference between what your vehicle is worth and how much you owe on your car loan at the time it's stolen or totaled. You need gap insurance when the amount you owe on your car loan is more than the current value of the car. This can happen when:

• You made a small down payment (less than 20%) when you bought the car.
• You have a long finance period (60 months or more).
• You bought a vehicle that depreciates quickly.
• You plan to put a lot of miles on the car, which will reduce its value.
• You've traded in a car that you still owe money on and added the remaining amount to your new car loan.

In general, most new car buyers benefit from gap coverage while the vehicle is less than three model years old. You can drop the coverage when your car loan is less than the current value of your car, which usually takes about two years.

When is gap insurance worth it?

Gap insurance is worth it if you're in one of the following situations:

• You've made a small down payment (i.e., less than 20%) on your car.
• You have a long finance period (i.e., more than 5 years).
• You've traded in an upside-down car and added the amount you still owe to your new car loan.
• You've bought a car with poor resale value or one that depreciates quickly.
• You plan to rack up miles quickly, which will drop your car's value.
• You've taken out a car loan with a long term.

In general, gap insurance is worth it if you owe more on your car than it's worth and you couldn't afford to pay the difference. It's also worth considering if you want to avoid the financial stress of having to pay off a car loan for a vehicle you no longer have.

How much does gap insurance cost?

The cost of gap insurance depends on the underwriter. Dealerships and lenders typically charge a flat rate for gap insurance, which can be anywhere between $500 and $700. This is usually the most expensive option. When you buy gap insurance from a dealership or lender, you will also pay interest on the sum as it will be rolled into your loan.

Insurance companies, on the other hand, charge an average of $20 to $40 per year for gap insurance when bundled with an existing insurance policy. This option only increases your comprehensive and collision insurance cost by about five to six per cent on average. If you want to buy a standalone gap insurance policy, you can expect to pay between $200 and $300.

According to Forbes Advisor's analysis, the average cost of gap insurance is $61 per year.

Where can you buy gap insurance?

When buying a brand-new vehicle, you can purchase gap insurance from the dealer or your auto insurance company. It is usually optional if you are financing a purchase but may be mandatory if you are leasing a vehicle.

Buying Gap Insurance from a Dealer

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. However, 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 will be paying interest on your gap coverage.

Buying Gap Insurance from an Auto Insurer

You can typically add gap coverage to an existing car insurance policy or a new policy, as long as your loan or lease has not 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 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.

Where to Buy Gap Insurance in Texas

In Texas, you can buy gap insurance either from an insurance company or through your dealership as a standalone policy. Not all insurers are authorised to offer gap insurance in Texas, so it is recommended to first get quotes from your auto insurance company. Coverage directly from insurers is often less expensive and may cost only a few dollars per month, especially if the coverage is added to an existing policy.

The following insurance companies are currently authorised to provide gap insurance coverage in Texas:

• American Modern Home Insurance Co.
• American National Property and Casualty Co.
• American Security Insurance Co.
• Balboa Insurance Co.
• Continental Casualty Co.
• Courtesy Insurance Co.
• Financial American Property and Casualty Insurance Co.
• First Colonial Insurance Co.
• Great American Insurance Co.
• Great American Insurance Company of New York
• Ironshore Indemnity Inc.
• Landcar Casualty Co.
• Lyndon Property Insurance Co.
• Markel Insurance Co.
• MIC Property and Casualty Insurance Corp.
• Old Republic Insurance Co.
• Old United Casualty Co.
• Securian Casualty Co.
• Sentruity Casualty Co.
• Service Lloyds Insurance Co.
• Spinnaker Insurance Co.
• State National Insurance Co.
• Transamerica Casualty Insurance Co.
• United Financial Casualty Co.
• Universal Underwriters Insurance Co.
• Work First Casualty Co.

Other Options

You can also try local credit unions, which may offer competitive rates and even shop around for you to find the best deal.

Frequently asked questions