Gap Insurance: Extended Coverage Explained

Gap insurance is an optional form of financial protection for drivers whose car loan balance is higher than their vehicle's worth in the event of theft or a total loss. It covers the 'gap' between the amount reimbursed by the driver's car insurance policy and the amount they still owe on their financing. In other words, gap insurance covers the difference between a car's actual cash value and the balance left on the loan or lease.

Gap insurance covers the difference between the value of your vehicle and the amount you owe on your car loan or lease

Gap insurance is a type of auto insurance that covers the difference between the value of your vehicle and the amount you owe on your car loan or lease. This type of insurance is particularly useful if you owe more on your car loan than your vehicle is worth.

For example, if you owe $25,000 on your loan and your car is only worth $20,000, gap insurance can cover the $5,000 difference, minus your deductible. This type of insurance is especially useful if you have a long-term loan, a small down payment, or a car that depreciates quickly.

Gap insurance is optional and not required by any insurer or state. However, some leasing companies or lenders may require you to purchase it. You can usually buy gap insurance from your car insurance company or from the dealer or lender. It's important to note that gap insurance won't cover your deductible, engine failure, or other repairs.

It is optional and can be added to your regular insurance policy or bought separately from the dealer

Gap insurance is optional and can be added to your regular insurance policy or bought separately from the dealer. It is a type of auto insurance that covers the difference between the compensation you receive after a total loss and the amount you owe on your financing or lease agreement. This type of insurance is useful if you owe more on your car than it is worth and can be purchased from your auto insurer or the dealer.

If you choose to add gap insurance to your regular insurance policy, it will typically cost around $20 a year. This option is generally more affordable than buying it separately from the dealer. When purchased from a car dealership, gap insurance can cost between $500 and $700 as a flat fee. However, this option may be more convenient for some, as it can be rolled into your loan payments. It is important to note that when added to your loan, you will also be paying interest on the cost of the insurance.

When considering whether to purchase gap insurance, it is essential to review the terms of your car loan or lease agreement. In some cases, gap insurance may be required. Additionally, it is worth comparing the costs of both options to determine which one best fits your needs. Factors such as the current value of your car, your state of residence, and your previous insurance claims can influence the cost of gap insurance.

Overall, gap insurance can provide valuable financial protection if you find yourself in a situation where your car is totaled or stolen, and you owe more on it than its current value. By purchasing gap insurance, you can bridge the gap between the amount reimbursed by your insurance and the amount you still owe, providing peace of mind during a stressful time.

You don't need gap insurance if you don't have a car loan or lease

Gap insurance is an optional form of financial protection that covers the difference between the amount still owed on a car loan or lease and the current value of the vehicle. This type of insurance is intended for situations where the amount owed on a car exceeds its current market value. This can occur when a car is purchased with a small down payment and a long payoff period, or when the car in question depreciates faster than average. In these cases, gap insurance can help minimise financial losses in the event of an accident or theft.

However, if you do not have a car loan or lease, you do not need gap insurance. Gap insurance is designed to protect individuals who owe more on their car than its current value, ensuring they are not left with outstanding debt in the event of a total loss. If you own your car outright, the "gap" between the car's value and the loan amount owed does not exist, and therefore gap insurance is not necessary.

It is important to note that gap insurance is not a replacement for comprehensive or collision insurance. Gap insurance only comes into play after a total loss, where the car is stolen or damaged beyond repair. It does not cover mechanical issues, engine failure, transmission problems, or death. Additionally, gap insurance does not cover your insurance deductible, so you will still be responsible for paying that amount out of pocket.

When considering whether to purchase gap insurance, it is essential to evaluate your financial situation and the value of your car. If you have a significant amount of money left on your car loan or lease, and the car's value is substantially lower, then gap insurance may be a worthwhile investment. On the other hand, if you can afford to absorb the difference between the car's value and the loan amount, or if the gap is relatively small, then gap insurance may not be necessary.

In summary, while gap insurance can provide valuable financial protection in certain circumstances, it is not required if you do not have a car loan or lease. The need for gap insurance depends on the relationship between the amount owed on a car and its current market value, and individuals should assess their own situations to determine if this type of insurance is appropriate for their needs.

It covers theft but does not cover engine failure, transmission failure, death, or your insurance deductible

Guaranteed Asset Protection (GAP) insurance is an optional form of coverage that can be purchased in addition to standard auto insurance. It covers the difference between the amount owed on a car loan and the amount covered by standard insurance in the event of theft or a total loss. While GAP insurance covers theft, it does not cover engine failure, transmission failure, death, or your insurance deductible.

When you buy a new car and take out a loan to finance the purchase, the vehicle starts to depreciate in value immediately. Most cars lose 20% of their value within the first year. Standard auto insurance policies only cover the depreciated value of a car, which is its current market value at the time of a claim. This means that in the early years of the vehicle's ownership, the amount of the loan may exceed the market value of the vehicle itself, leaving a "gap".

GAP insurance covers this difference between what the vehicle is currently worth (covered by standard insurance) and the amount still owed on the loan. This coverage only applies if the car is stolen or declared a total loss, and not in cases of engine or transmission failure. It also does not cover the insurance deductible, which is the amount subtracted from a claim payout.

For example, let's say you buy a new car worth $25,000 and take out a loan for the full amount. A few months later, your car is stolen. At the time of the theft, the value of the car has depreciated to $24,500, but you still owe $25,000 on the loan. With comprehensive insurance, your insurance company will pay $24,000, which is the value of the car minus your $500 deductible. With GAP insurance, the remaining $1,000 on the loan would be covered. Without GAP insurance, you would have to pay this remaining balance yourself, in addition to your deductible.

In summary, while GAP insurance provides valuable protection in the event of theft or a total loss, it does not cover all potential costs associated with vehicle ownership. Engine and transmission repairs, death, and the insurance deductible are not covered by GAP insurance, and separate coverage or alternative forms of protection should be considered to manage these risks.

It is worth considering if you owe more on your car loan than the car is worth

Gap insurance, or guaranteed asset protection, 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. This type of insurance is worth considering if you owe more on your car loan than the car is worth.

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, which means that in the event of an accident, your insurance will only cover the current market value of the vehicle. If you owe more on your car loan than the car is worth, you will be responsible for paying off the remaining loan amount.

Gap insurance can protect you from this financial burden by covering the difference between the depreciated value of the car and the loan amount owed. This can be especially important if you made a small down payment on the car or have a long loan term, as you may owe more than the car's current value.

To determine if gap insurance is worth it for you, you can calculate the potential value of gap insurance. First, use a resource like Kelley Blue Book to estimate your car's value, as well as its value after each year of ownership until your loan is fully paid off. Then, review your loan terms and check how much you will still owe in payments after each year of ownership, comparing this to your car's estimated value. Finally, calculate how much you will pay in gap coverage during those years. The difference between your car's value and the amount you will owe in payments is the amount that gap coverage protects you from potentially having to pay.

In general, most new car buyers benefit from gap coverage while the vehicle is less than three model years old. Gap insurance can provide financial protection and peace of mind if you owe more on your car loan than the car is worth. However, it is important to consider the cost of gap insurance and whether the benefits outweigh the additional expense.

Frequently asked questions