Unearned Gap Insurance: What You Need To Know

Gap insurance is a type of auto insurance that covers the difference between the compensation you receive for a total loss and the amount you owe on your financing or lease agreement. In other words, it covers the gap between the money you receive from the reimbursement and the amount you still owe on the car. This type of insurance is particularly useful if you owe more on your car loan than the car is worth, for example, if you didn't make a down payment or chose a long loan term. Gap insurance is optional and can be purchased as an add-on to your existing car insurance policy or separately from a dealer, although it is generally more expensive to buy it from a dealer.

When you might need gap insurance

Gap insurance is an optional, additional coverage that can help certain drivers cover the difference between the financed amount owed on their car and the car's actual cash value (ACV) in the event of a covered incident where their car is declared a total loss. It is also known as guaranteed asset protection insurance.

You Owe More on Your Car Loan Than the Car is Worth:

If you are currently making car loan payments, calculate the loan balance and compare it to your car's current cash value. If there is a gap, you should consider getting gap insurance. This scenario is more common when you are not making a large down payment on the car or when the car depreciates quickly.

Your Car Loan or Lease Requires Gap Insurance:

Some lenders or leasing companies may require you to purchase gap insurance as a protective measure. In these cases, you may have the option to get gap insurance through your insurance company or as part of your lease agreement.

You Have a Long Loan Term or High-Interest Rate:

If you have a long loan term, such as 60 months or more, or a high-interest rate, your car may depreciate faster than you can pay off the loan. In this case, gap insurance can help protect you from negative equity.

Your Car Depreciates Quickly:

Some cars lose value rapidly, especially new cars as soon as they are driven off the lot. If you buy a car that depreciates quickly, gap insurance can help cover the difference between the financed amount and the car's actual value if it is declared a total loss.

You Have Negative Equity:

If you have negative equity, it means you owe more on your loan than your car is worth. This can happen if you have a small down payment, a long financing term, or a car that depreciates quickly. Gap insurance can help protect you in this situation.

In summary, gap insurance is worth considering if you want protection against the potential financial gap between your car loan and the car's actual value, especially in the event of a total loss. It is important to weigh the cost of gap insurance against the potential benefits for your specific situation.

Where you can get it

Gap insurance can be purchased from a variety of sources, depending on your preference and circumstances. Here is a list of places where you can get gap insurance:

Auto Insurer

You can typically add gap insurance to an existing car insurance policy or purchase it as a new policy. Buying gap insurance from an insurance company may be more cost-effective, and you won't have to pay interest on your coverage. It is recommended to check with your current insurer to determine the cost of adding gap coverage to your existing policy.

Car Dealership

When you buy or lease a car, the dealer will likely offer you the option to purchase gap insurance as part of your financing package. However, buying gap insurance from a dealer can be more expensive if the cost of coverage is included in your loan amount, resulting in interest charges on your gap coverage.

Lender or Financial Institution

You can also purchase gap insurance through the institution that financed your vehicle. This option may be convenient if you are already doing business with them. However, as with car dealerships, buying gap insurance from a lender will likely result in higher costs due to interest charges over the life of the loan.

Manufacturer

In some cases, you may be able to purchase gap insurance directly from the vehicle's manufacturer. This option may be available if the manufacturer has a financial services division or partnerships with insurance providers.

It is important to note that not all insurance companies offer gap insurance in all states, so you may need to shop around and compare prices to find the best option for your specific needs and location. Additionally, gap insurance is typically only available if you are the original loan or leaseholder of a new vehicle, although some insurers may offer it for certain used vehicles as well.

How much it costs

The cost of Guaranteed Asset Protection (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. Dealerships and lenders often sell GAP insurance for a flat rate, usually between $500 and $700, which are the highest rates for this type of policy. Additionally, you will pay interest on the sum if it is rolled into your loan.

On the other hand, insurance companies offer GAP insurance at significantly lower rates. They charge an average of $20 to $40 per year when buyers bundle it into an existing insurance policy. This increases your comprehensive and collision insurance cost by about 5 to 6%. If you prefer a standalone GAP insurance policy, you can expect to pay between $200 and $300. According to Forbes Advisor, the average cost of GAP insurance is $61 per year.

It is worth noting that factors such as the vehicle's actual cash value and auto insurance claims history can also influence the cost of GAP insurance. When considering GAP insurance, it is advisable to compare the costs of purchasing it from a dealership or lender versus adding it to an existing insurance policy to find the most suitable option for your needs.

Whether it's worth it

Gap insurance is a type of auto insurance that covers the difference between the amount reimbursed by a driver's car insurance policy and the amount they still owe on their loan or lease in the event of a total loss. This type of insurance is particularly useful if you owe more on your car loan than the car is worth.

Whether or not gap insurance is worth it depends on your financial situation and the value of your car. If you have enough money to cover the difference between the insurance payout and the remaining loan, you may not need gap insurance. On the other hand, if you cannot afford to pay off the remaining loan balance in the event of a total loss, gap insurance can provide valuable protection.

• The cost of gap insurance: Gap insurance is relatively inexpensive, with an average annual cost of around $20 to $60. However, the cost can vary depending on your state, driving record, vehicle, and other factors.
• The value of your car: If your car is worth more than the amount you owe on your loan or lease, you may not need gap insurance. In this case, the insurance payout should be sufficient to cover the remaining loan balance.
• The age and condition of your car: Gap insurance is typically only available for new vehicles. Older vehicles or those with high mileage may not qualify for gap insurance.
• Your financial situation: If you can afford to absorb the difference between the insurance payout and the remaining loan balance, you may not need gap insurance. However, if this would be a financial burden, gap insurance can provide valuable peace of mind.
• The terms of your car loan or lease: Some lenders or leasing companies may require you to have gap insurance as part of your financing agreement. In this case, you may not have a choice but to purchase gap insurance.
• The likelihood of a total loss: If you live in an area with a high risk of car theft or accidents, the chances of a total loss may be higher, making gap insurance more worthwhile.

In conclusion, whether or not gap insurance is worth it depends on your individual circumstances. It can provide valuable protection in the event of a total loss, but it may not be necessary if you can afford to cover the difference between the insurance payout and the remaining loan balance. It is important to carefully consider your financial situation, the value of your car, and the terms of your car loan or lease before deciding if gap insurance is right for you.

When it pays out

Gap insurance is an optional auto insurance coverage that applies if your car is stolen or deemed a total loss. It pays out when your loan amount is more than your vehicle is worth, covering the difference between the compensation you receive and the amount you still owe on a car loan. For example, if you owe $25,000 on your loan and your car is only worth $20,000, gap insurance covers the $5,000 gap, minus your deductible.

Gap insurance will pay out if your car is stolen or if it is a total loss following an accident. It will not pay out if your car is damaged but repairable, or if the claim is over the limit. Some policies may have a limit on the amount of the claim, which is usually a percentage of the vehicle's value. Gap insurance also won't pay out if the policy premiums haven't been paid or if the policy has lapsed due to non-payment when the total loss occurs.

Gap insurance is designed to protect you from depreciation. Once you buy your car, its value starts to decrease. If you finance or lease a vehicle, this depreciation leaves a gap between what you owe and the car's value. For example, if you finance $30,000 for a new car and, after a few years of making payments, the car is now worth $20,000 but you still owe $25,000 on your loan, there is a $5,000 gap. If the vehicle is totalled, your insurer would pay you $25,000 (minus your deductible) with gap insurance, whereas without it, you would only receive $20,000 (minus your deductible).

Gap insurance is particularly useful if there is a significant difference between your car's value and what you owe on it, if you're leasing your car, if you made a lower down payment on a new car, or if you have a longer financing term for your vehicle.

Frequently asked questions