Insurance Enrollment: Understanding The Gap

Gap insurance is an optional type of insurance that covers the difference between what a car is worth and what the driver owes on their auto loan or lease if the car is stolen or declared a total loss. It is also known as Guaranteed Asset Protection insurance and is particularly useful for drivers who owe more on their car loan than the car is worth, have made a small down payment, or have a car that depreciates quickly. Gap insurance can be purchased from car insurance companies, loan providers, or dealerships, with costs varying depending on the provider and the circumstances of the driver.

What is gap insurance?

Gap insurance, which stands for Guaranteed Asset Protection insurance, is an optional add-on product that covers the difference between the amount you owe on your auto loan and the amount your insurance company pays out if your car is stolen or deemed a total loss.

When you buy a new car, the vehicle starts to depreciate in value the moment 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, meaning that the insurance company pays the current market value of the vehicle at the time of a claim. This can leave a "gap" between the amount paid out by your insurance and the amount you still owe on your car loan.

For example, imagine you have an auto loan of $25,000 for a new vehicle, and you carry a full coverage car insurance policy. Your car is then stolen, and you file a claim with your insurance provider. Your insurance company factors in depreciation and only pays out $20,000. In this instance, gap insurance could help cover the remaining $5,000 you owe on your auto loan (minus your deductible).

Gap insurance is typically only available for brand-new vehicles or for models that are less than three years old. It is also more expensive to purchase gap insurance from a dealership than directly from an insurer. In the US, some lenders and leasing companies may require you to purchase gap insurance, but it is not required by any insurer or state.

When is gap insurance worth it?

Gap insurance is worth it in several circumstances. If you are underwater on your loan term, or if you owe more on your car loan than the car is worth, gap insurance can help.

For example, if you have a long finance period, or you put little or no money down when you financed your car, gap insurance is a good idea. It's also worth considering if you have a low-resale-value car, or if you plan to add a lot of miles to your car, which will impact its value.

Gap insurance is also worth it if your lease requires it. Many auto leases require gap insurance as a protective measure, and some lease providers may include gap insurance in the price of the lease.

Additionally, if you are a cautious, responsible driver, gap insurance can give you peace of mind. Although you may be a good driver, not everyone else on the road is, and accidents can happen. Not having gap insurance if you are "upside down" on your car loan could mean being reimbursed for thousands less in the event of a total loss.

Gap insurance is relatively low-cost coverage, usually costing between $20 and $60 per year when bundled with an existing policy. It can be purchased independently for an average rate of $200 to $300 per year.

Where can you buy gap insurance?

When buying a new car, you can get gap insurance from either the dealer or your auto insurance company. If you're leasing a vehicle, gap insurance might be mandatory, whereas it is usually optional if you're financing a purchase.

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 would pay 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 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.

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.

How much does gap insurance cost?

The cost of gap insurance depends on the underwriter and your personal circumstances. Dealerships and lenders typically charge higher prices for GAP insurance than car insurance companies. Lenders and dealerships sell GAP insurance for a flat rate, usually 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 will only increase your comprehensive and collision insurance cost by about five to six per cent 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.

The cost of GAP insurance can also vary depending on your state, driving record, age, vehicle and other factors.

What does gap insurance cover?

Guaranteed Asset Protection (GAP) insurance is an optional product that covers the difference between the amount you owe on your auto loan and the amount the insurance company pays if your car is stolen or totaled. This type of insurance is designed for people who finance or lease their vehicles. It covers the difference (or "gap") between the car's actual value and the outstanding balance on a loan or lease.

For example, let's say you finance a $25,000 car. A few months after purchasing the vehicle, it is in an accident and the insurance adjuster declares it a total loss. Your collision or comprehensive insurance will cover the loss. However, if the insurance adjuster determines that the actual cash value of your car is $20,000, but your loan balance is $24,000, you owe more on your loan than the car is worth. In this case, a gap insurance policy would cover the remaining $4,000 that you would otherwise have to pay out of pocket.

Gap insurance only covers you if your vehicle is totaled or damaged and you owe more on your loan than the car is valued at when the incident happens. You can file a gap insurance claim if your car was stolen or if it was totaled in an accident. It is important to note that gap insurance does not cover costs related to vehicle repairs, personal injuries, or other accident-related expenses.

When considering whether to purchase gap insurance, it is important to compare prices and coverage from different providers. It is also important to monitor your loan balance and actual car value to determine if you should maintain a gap insurance policy over time.

Frequently asked questions