Gap Insurance: Protecting Your Land Investment

Gap insurance, or guaranteed asset protection, is an optional type of auto insurance that covers the difference between the amount owed on a car loan or lease and the car's actual cash value in the event of theft or total loss. In other words, gap insurance covers the “gap” between the amount reimbursed by the driver's car insurance policy and the amount they still owe on their financing. This type of insurance is particularly useful for drivers who owe more on their car loan than the car is worth, such as those who made a small down payment, chose a long loan term, or leased their vehicle. Gap insurance can be purchased from car insurance companies, loan providers, or dealerships, with costs varying depending on the source and the driver's circumstances.

When is gap insurance worth it?

Gap insurance is a type of auto insurance that covers the difference between the amount reimbursed by the driver's car insurance policy and the amount they owe on their financing in the event of a total loss. This type of insurance is particularly useful for new car purchases, as most cars lose 20% of their value within the first year.

• Small down payment: If you made a small down payment or no down payment at all when financing your car, you may want to consider gap insurance. Without a significant down payment, you will likely owe more on the car loan than the car is worth, creating a "gap" that gap insurance can cover.
• Long finance period: If you have a long-term loan (more than 60 months), it will take longer for your loan balance and the car's value to equalize. During this time, gap insurance can provide valuable protection.
• Quick depreciation: If you purchase a vehicle that depreciates faster than average or plan to put on a lot of miles quickly, gap insurance can be worth it. High mileage and rapid depreciation can decrease the resale value of your car more quickly than your loan payments can keep up.
• Negative equity: If you traded in a previous vehicle with negative equity and rolled that amount into your new loan, gap insurance can help protect you. In this case, if your new car is totaled or stolen, you could be left with a significant financial burden.
• Lease or loan requirements: Some lease or loan agreements may require you to have gap insurance. In these cases, purchasing gap insurance is necessary to comply with the terms of your agreement.

In general, gap insurance is worth considering if you owe more on your car loan than the car is currently worth or if you anticipate that situation arising in the future. However, if you own your car outright or owe less than its current value, gap insurance may not be necessary. Additionally, it's important to shop around and compare the costs of purchasing gap insurance from your insurance company or dealership, as prices can vary significantly.

When do you need gap insurance?

Gap insurance is an optional form of insurance that covers the difference between the value of your vehicle and the amount you owe on your car loan in the event of a total loss. This type of insurance is designed for drivers who owe more on their car loan than their vehicle is worth.

• You owe more on your car loan than your car is worth: If you are in a situation where you owe more on your car loan than the current value of your car, gap insurance can help protect you financially. This scenario often arises when you have a large loan, made a small down payment (or no down payment), have a long loan term, or your car depreciates quickly.
• Your car loan or lease requires gap insurance: Some lenders or leasing companies may require you to have gap insurance as a protective measure. In these cases, gap insurance helps protect them from car owners who might walk away from their loan or lease if the car is totaled or stolen.
• You want peace of mind and financial protection: If you cannot afford to pay the difference between the amount you owe and the car's value in the event of a total loss, gap insurance can provide financial peace of mind. It ensures that you won't be left with a significant financial burden if your car is stolen or involved in an accident.
• You have a high-value or quickly depreciating vehicle: If you have a vehicle that is likely to depreciate quickly, such as a luxury car or a sports car, gap insurance can be beneficial. It can also be useful if you have a high-value vehicle that would result in a substantial loan balance if it were to be totalled.
• You have a leased vehicle: Gap insurance is often recommended for leased vehicles since your monthly lease payments may not be reducing the vehicle's value quickly. In the event of a total loss, gap insurance can help cover the difference between the insurance payout and the remaining lease payments.

Remember, gap insurance is not necessary if you don't have a car loan or lease, or if the amount you owe is less than the car's value. You can assess your need for gap insurance by comparing your loan balance with the current value of your car.

How does gap insurance work?

Gap insurance, or guaranteed asset protection, is an optional form of financial protection for drivers whose car loan balance is more than the current market value of their vehicle. It is designed to bridge the gap between the amount owed on a car loan and the car's actual worth if it is stolen or declared a total loss.

When a vehicle is declared a total loss or is stolen and not recovered, gap insurance covers the difference between the amount paid out by comprehensive or collision coverage and the remaining balance on the car loan. It is important to note that gap insurance does not cover other property damage, injuries, engine failure, or other repairs resulting from an accident.

For example, let's say you owe $25,000 on your car loan, but your car is only worth $20,000. If your car is totalled in an accident, your comprehensive insurance will pay you $20,000 (minus your deductible). With gap insurance, you are covered for the extra $5,000 needed to pay off your loan. Without it, you would be responsible for the remaining $5,000, plus your insurance deductible.

When to consider gap insurance

Gap insurance is worth considering if there is a significant difference between your car's actual value and what you owe on it. It is also a good option if you have leased your car, made a smaller down payment, have a longer financing term, or want protection against depreciation. Additionally, some lenders and leasing companies may require gap insurance for leased vehicles.

Cost of gap insurance

The cost of gap insurance varies depending on the provider. Car insurance companies typically charge a few dollars a month or around $20 to $40 per year for gap insurance. On the other hand, dealerships and banks charge a flat fee of around $400 to $700 for gap insurance, which is then added to your auto loan, resulting in additional interest charges.

How much does gap insurance cost?

The cost of GAP insurance depends on several factors, including the underwriter, your state, driving record, and vehicle. Dealerships and lenders typically charge higher prices for GAP insurance than car insurance companies.

Dealer and Lender Prices

Dealers and lenders often sell GAP insurance for a flat rate between $500 and $700, which are the highest rates for this type of policy. Additionally, you will pay interest on the sum since it will be rolled into your loan. Texas law limits the cost of GAP coverage to 5% of the loan amount.

Insurance Company Prices

Insurance companies usually charge lower rates for GAP insurance, especially when bundled with an existing insurance policy. In this case, you can expect to pay an average of $20 to $40 per year, increasing your comprehensive and collision insurance cost by about 5-6%. If you want a standalone GAP insurance policy, the cost will be higher, ranging from $200 to $300.

Factors Affecting GAP Insurance Cost

Factors that can influence the cost of GAP insurance include the vehicle's actual cash value (ACV) and auto insurance claims history. It is worth noting that GAP insurance is generally not required and is optional coverage. However, some states mandate that car dealers offer it to their customers.

Where can you buy gap insurance?

When buying a new car, you can purchase gap insurance from either the dealer or your auto insurance company. While gap insurance is usually optional when financing a purchase, it may 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. 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. Gap products you get from a car dealer may not be insurance, so it's important to read the information that comes with a dealer gap product to know how to get help if you need it.

Buying gap insurance from an 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 the cost of adding 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.

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, but you can get quotes from your auto insurance company. Coverage directly from insurers is often less expensive, often around several dollars per month, particularly 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 places to buy gap insurance

• Credit unions: One user on Reddit recommended trying local credit unions, as they can offer cheaper rates.
• Banks: Your bank might offer you gap coverage when you buy your car.

Frequently asked questions