Gap Insurance: What Kentucky Drivers Need To Know

Gap insurance is an optional type of car insurance that covers the difference between a car's value and the amount the driver owes on their auto loan or lease if the car is stolen or written off. In other words, it covers the gap between what a vehicle is currently worth (which a standard insurance policy will pay) and the amount the driver owes on it. Gap insurance is designed to protect automobile owners from paying the remaining loan or lease balance on a vehicle they can no longer drive. It is not a legal requirement but may be required by lenders and lessors.

When is gap insurance necessary?

Gap insurance is designed to protect automobile owners if their car is totaled or stolen. It covers the difference between the depreciated value of the car and the loan amount owed if the car is involved in an accident. It is an optional coverage in Kentucky, but it is necessary in certain situations.

Gap insurance is necessary when there is a "gap" between the current value of your car and the amount you owe on your loan or lease. This can happen when you have made a small down payment on the car, typically less than 20%, and/or you have a long finance period, usually over 60 months. In these cases, the amount you owe on the loan may be more than the car's current value, and gap insurance will cover the difference if the car is totaled or stolen.

For example, if you bought a car worth $25,000 and made a down payment of $5,000, you would still owe $20,000 on the loan. If your car is totaled in an accident, your standard insurance will only cover the current value of the car, which may be less than what you owe. Gap insurance would cover the remaining loan amount, protecting you from financial loss.

Additionally, gap insurance is generally required if you lease a vehicle. It is also recommended if you have purchased a vehicle that depreciates faster than average or if you have rolled over negative equity from an old car loan into the new loan.

It's important to note that gap insurance is not necessary if you have made a substantial down payment on the car, such as 20% or more, or if you are paying off the loan in less than five years. In these cases, the likelihood of owing more than the car's value is lower, and the need for gap insurance is reduced.

In summary, gap insurance is necessary when there is a significant gap between the current value of your car and the amount you owe on your loan or lease. It provides financial protection in case of total loss or theft of your vehicle, ensuring that you don't have to continue making payments on a car that is no longer usable.

How much does it cost?

The cost of GAP insurance in Kentucky will depend on a variety of factors, including the type of vehicle, loan terms, and the insurance company's policies. GAP insurance is typically purchased for brand new cars, but it can also be taken out on used models.

The cost of GAP insurance is generally higher for more expensive cars, as they have a higher resale value. The make and model of the car can also impact the cost of GAP insurance, as some cars are more attractive to thieves and are more likely to be modified. Additionally, the age of the vehicle is a factor, with newer cars generally being cheaper to insure than older ones.

The length of the loan term also affects the cost of GAP insurance. Longer loan terms typically result in higher GAP insurance costs because there is a greater chance that the car owner will owe more than the car is worth.

Your driving history and demographics will also impact the cost of GAP insurance. Young and inexperienced drivers are often considered high-risk, and their premiums may be more expensive. A history of traffic violations or accidents can also lead to higher GAP insurance rates.

It's important to shop around and compare prices from multiple insurance providers to find the best deal. The cost of GAP insurance in Kentucky can range from $200 to $700 per year, but it can vary depending on the specific circumstances.

Where can you buy it?

There are several options for purchasing gap insurance in Kentucky. You can buy it from your car insurance company, a company offering stand-alone gap insurance policies, your car dealer, or the bank/financial institution that offered you a loan for your car.

According to a rate analysis by Insurance.com, the average cost of gap insurance in Kentucky is $1,927 per year. However, it is recommended to compare quotes from multiple sources before making a purchase, as rates vary from one insurance provider to another.

You can also buy gap insurance online if you do not already have an auto insurance policy or your current insurer doesn’t offer gap coverage. An online insurance provider can be an effective way to request quotes quickly and find an affordable policy.

If you are buying or leasing a new car, the dealer will likely ask if you want to purchase gap insurance when discussing 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.

You can also 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 to add gap coverage to a car insurance policy.

What does gap insurance cover?

Gap insurance is designed to protect automobile owners if their car is stolen or totaled. It covers the difference between the amount you owe on a car loan and the car's actual cash value. This type of insurance can be extremely valuable if you owe more on your car than it is worth.

For example, let's say you finance a $25,000 car. Within a few months of purchasing it, 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, depending on the nature of the damage. The adjuster determines that the actual cash value of your car is $20,000, but your loan balance is $24,000. In this case, you owe more on your loan than the car is worth, often referred to as being "underwater." Even though your car is totaled, you're still responsible for paying off the entire loan. A gap insurance policy would cover the remaining $4,000 that you'd 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 claim if your car was stolen or if it was totaled in an accident. 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 doesn't cover damages to someone else's property or vehicle rentals/replacements.

The cost of gap insurance can vary. The average cost of gap insurance in Kentucky is $1,927 per year, according to a 2023 rate analysis by Insurance.com. The cost depends on factors such as the value of your car, the insurance company, your location, and your age. It is typically offered as an optional add-on product by car dealers and insurance companies, and it can be included in your financing agreement if you're leasing a car.

Is it worth getting?

Whether or not gap insurance is worth getting depends on several factors. Firstly, it is important to note that gap insurance is only applicable if you have financed or leased a new vehicle. It is designed to protect automobile owners if their car is totaled or stolen, by covering the difference between the amount they owe on their car loan and the car's actual cash value. This type of insurance can be particularly useful if you owe more on your car loan than the car is worth, which can happen if you made a small down payment or have a long finance period.

The cost of gap insurance varies but is generally inexpensive, typically increasing your premium by around $40 to $60 per year if added to a car insurance policy that includes collision and comprehensive insurance. However, if purchased from a dealership, it can cost hundreds of dollars a year. When deciding whether or not to get gap insurance, it is worth considering the potential value of the insurance to you. You can do this by estimating your car's value and loan value over time and comparing this to the cost of gap coverage.

In general, gap insurance is worth considering if you have financed or leased a new vehicle, made a small down payment, have a long finance period, or purchased a vehicle that depreciates quickly. However, if you do not fall into any of these categories, gap insurance may not be necessary.

Frequently asked questions