Gap Insurance: Vehicle Protection

Gap insurance, or guaranteed asset protection, is an optional form of auto insurance that covers the difference between the amount owed on a vehicle and the amount an insurance company pays out if the car is stolen or deemed a total loss. It is designed to protect drivers from financial loss in the event that their car is damaged beyond repair, and the amount they owe on the car loan exceeds the depreciated value of the vehicle. This type of insurance is particularly relevant for newer vehicles, which can depreciate in value as soon as they are driven off the dealership lot. While gap insurance is not legally required, lenders or lessors may require it as a condition of a loan or lease.

When is it worth buying gap insurance?

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

• You've made a small down payment (less than 20%) and have a large auto loan.
• You have a long-term finance period (5 years or more).
• You've rolled negative equity from your last car loan into your new car loan.
• You've bought a vehicle that depreciates quickly.

Gap insurance is also worth buying if you can't afford to pay the difference between the amount owed and the car's value in the event of a total loss.

On the other hand, gap insurance may not be worth it if:

• The amount you owe is less than the car's value, or only slightly more.
• You can afford to pay the difference between the amount owed and the car's value.
• You've made a down payment of at least 20% on the car.
• You're paying off the car loan in less than five years.
• The vehicle is a make and model that historically holds its value.

When is gap insurance not worth it?

Gap insurance is not worth it in several scenarios. Firstly, if you have a car loan that is less than the car's value, or only slightly more, gap insurance is unnecessary. In this case, there is little to no gap to cover, so the insurance would not provide any benefit. Additionally, if you can afford to pay the difference between the amount owed and the car's value in the event of a total loss, gap insurance may not be needed.

Another instance where gap insurance may not be worth it is when you have made a substantial down payment on the car, such as 20% or more. This reduces the likelihood of being "upside down" on your loan, even in the initial years of ownership. Similarly, if you plan to pay off the car loan in a short period, typically less than five years, gap insurance may not be necessary. The faster you pay off the loan, the less likely you are to owe more than the car's value.

Furthermore, if you own a vehicle that historically retains its value or depreciates slower than average, gap insurance may not provide significant benefits. Such vehicles are less likely to result in a substantial gap between the loan amount and the car's value. Therefore, it is essential to consider the make and model's depreciation rate when deciding on gap insurance.

Lastly, gap insurance is not required if you are not financing or leasing your car. Gap insurance is specifically designed for situations where there is a gap between the amount owed on a loan or lease and the car's value. Therefore, if you own your car outright, gap insurance is not applicable or necessary.

How does gap insurance work?

Gap insurance is an optional form of auto insurance that covers the difference between the amount you owe on your car loan and the amount your insurance company pays if your car is stolen or deemed a total loss. This type of insurance is designed for people who finance or lease their vehicles. It is not required by law, but it can be a valuable safeguard in certain situations.

When you buy a new car, it starts to depreciate in value immediately. Standard auto insurance policies cover the depreciated value of a car, which is the current market value of the vehicle at the time of a claim. In the event of an accident where your car is badly damaged or totalled, gap insurance covers the difference between the current value of your car (which your standard insurance will pay) and the amount you actually owe on it. This can be a significant difference, especially if you have a small down payment, a long financing term, or a car that depreciates quickly.

For example, let's say you finance a $25,000 car. A few months later, your car is in an accident and is declared a total loss by an insurance adjuster. Your collision or comprehensive insurance will cover the loss, but the adjuster determines that the actual cash value of your car is only $20,000, while your loan balance is $24,000. In this case, you owe more on your loan than the car is worth, and you would be responsible for paying off the entire loan. A gap insurance policy would cover the remaining $4,000 that you would otherwise have to pay out of pocket.

Gap insurance is typically offered by car dealers, insurers, and direct lenders. It can be purchased at the time of sale or included in your financing agreement. The cost of gap insurance varies, but dealerships typically charge a flat rate of $400 to $700. When added to your comprehensive and collision coverage, gap insurance will only increase your annual premium by about $20 on average.

It's important to note that gap insurance does not cover costs related to vehicle repairs, personal injuries, or other accident-related expenses. It also does not cover engine failure or other repairs. Gap insurance is intended to protect you financially when you owe money on a depreciated vehicle.

Where can you buy gap insurance?

When buying a new car, you can get gap insurance from the dealer or your auto insurance company. It is usually optional if you're financing a purchase, but it might be mandatory if you're 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. 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. Some dealers include a cancellation period of 30 days, during which you can cancel your gap insurance and receive a full refund.

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 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.

Buying gap insurance in Texas

In Texas, you can buy gap insurance from car dealerships, insurance companies, or financial institutions such as credit unions. Some providers of gap insurance in Texas include:

• Associated Credit Union of Texas
• Allstate
• Greater Texas Credit Union
• USAA
• Texas DPS Credit Union

How much does gap insurance cost?

The cost of gap insurance varies depending on where you purchase it. Dealerships and lenders charge higher prices for GAP insurance than car insurance companies. Lenders and dealerships sell GAP insurance for a flat rate, typically between $500 and $700, which are the highest rates for this type of policy. Plus, you will pay interest on the sum since 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 into an existing insurance policy. This only increases your comprehensive and collision insurance cost by about 5 to 6% on average, making it a lot more affordable. If you want to buy a standalone GAP insurance policy, you can expect to pay between $200 and $300.

Progressive, for example, offers GAP insurance for as low as $5 per month when included in an existing car insurance policy.

The cost of GAP insurance can also depend on your vehicle's actual cash value (ACV) and your auto insurance claims history.

Frequently asked questions