Minds At Ease: Gap Insurance Explained

Gap insurance, or Guaranteed Asset Protection insurance, is an optional add-on product that covers the difference between the amount owed on an auto loan and the amount an insurance company pays out if a vehicle is stolen or deemed a total loss. In other words, it covers the gap between the financed amount owed on a car and its actual cash value. This type of insurance is particularly useful for drivers who owe more on their car loan than the car is worth, as it can help them avoid steep out-of-pocket costs. Gap insurance is typically available for brand-new vehicles or models less than three years old, and it can be purchased from dealerships or insurance companies, with the latter usually being the more cost-effective option.

When is gap insurance worth it?

Gap insurance is an optional, add-on coverage that can help certain drivers cover the difference between the financed amount owed on their car and their car's actual cash value (ACV) in the event of a total loss. This could be due to theft or a covered accident.

Gap insurance is worth it in the following circumstances:

• You made a small down payment: If you put little or no money down when financing your car, gap insurance is worth considering. This is because the amount you owe in car payments can quickly exceed your car's value.
• You have a long finance period: If you have taken out a long-term car loan (60 months or more), gap insurance can be a good idea. This is because the longer the loan period, the more likely it is that you will owe more than the car is worth.
• You purchased a vehicle that depreciates quickly: If you have financed a vehicle that may depreciate at a faster rate, such as a luxury sedan or SUV, gap insurance can provide added protection. This is because gap insurance covers the difference between the financed amount owed and the car's ACV.
• You plan to put a lot of miles on your car: If you plan to drive your car extensively, this will impact its value quickly. Gap insurance can help cover the difference between the financed amount owed and the car's reduced ACV.
• Your lease requires gap insurance: Many auto leases require gap insurance as a protective measure, and it may already be included in the lease price. In this case, gap insurance is worth it for the added financial security.
• You have a car loan that requires gap insurance: Some lenders may require gap insurance from the outset of your loan, regardless of how much you owe or the value of your car. In this case, it is worth purchasing gap insurance to meet the requirements of your loan.

It's important to note that gap insurance is not necessary if you owe less than your car's value or can afford to pay the difference between the amount owed and the car's value in the event of a total loss. Additionally, gap insurance is typically only needed for the first few years of a loan, until the remainder of the loan drops below the value of the vehicle.

What does gap insurance cover?

Guaranteed Asset Protection (GAP) insurance is an optional add-on 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 deemed a total loss. GAP insurance is designed for people who finance or lease their vehicles. It covers the difference between your car's actual value and your outstanding lease or loan balance.

For example, if you finance a $25,000 car and a few months later it is in an accident and the insurance adjuster declares it a total loss, your collision or comprehensive insurance will cover the loss. If the insurance adjuster determines that the actual cash value of your car is $20,000, but your loan balance is $24,000, you would 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 does not cover costs related to vehicle repairs, personal injuries, or other accident-related expenses.

GAP insurance is not required by law and is not necessary if you own your vehicle outright or if your loan balance is lower than the value of your vehicle. However, if you lease or finance a new car, you may need GAP insurance. Many lenders or lessors require drivers to carry it as a condition of a loan or lease.

How does gap insurance work?

Gap insurance, or guaranteed asset protection, is an optional form of coverage that can be added to your auto insurance policy. It is intended to cover 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.

For example, if your new car is stolen and at the time it is worth $25,000, but you still owe $30,000 on the car loan, gap insurance will cover the remaining $5,000. Without gap insurance, you would have to cover the remaining balance on your loan as well as your insurance deductible.

Gap insurance is designed to be used in conjunction with comprehensive and collision coverage, which are typically required when you buy or lease a new vehicle. Comprehensive and collision coverage pay for damage to your car after accidents, fire, or theft, but they will only pay out the current market value of the car. So, when you owe more on your car loan or lease than the car is worth, gap insurance covers that amount.

You can purchase gap insurance from your auto insurer, or through the dealership or lender, rolled into your loan payments. However, if you buy gap insurance through your dealership or lender, you will be paying interest on the cost of the insurance over the life of the loan, making it a more expensive option.

It is important to note that gap insurance is not required and you only need it if you lease a vehicle or have a loan. Additionally, if your loan is paid down below the value of your car, you can drop the gap insurance coverage.

When to buy gap insurance

Gap insurance is an optional form of coverage that pays 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 not required by state law, but it may be required by lenders and lessors.

• You made a low down payment (less than 20%, for example) on a large loan.
• You have a long-term loan (for example, a term that is 60 months or longer).
• You leased your car. Auto leases have lower monthly payments than loans because the lessee pays much less principal every month. Many leases include gap coverage automatically.
• You have a car that depreciates in value quickly, like a sports car or an electric vehicle.
• You carried over negative equity from a past car loan into your current car loan.
• You roll other products into your auto financing, such as financing extended service agreements, dealer-installed options, or debt from previous auto financing.
• You have a high-mileage car. Driving more than 15,000 miles per year speeds up your car’s depreciation.

Where to buy gap insurance

When buying a new car, you can get gap insurance from either the dealer or your auto insurance company. It is usually offered as an option when you discuss financing options with the dealer. However, buying gap insurance from a dealer can be more expensive if the cost of coverage is bundled into your loan amount, resulting in interest payments on your gap coverage.

On the other hand, purchasing gap insurance from an insurance company may be more cost-effective, and you won't have to pay interest on your coverage. You can typically add gap coverage to an existing car insurance policy or a new policy, provided your loan or lease hasn't been paid off. If you already have car insurance, it is advisable to check with your current insurer about the cost of adding gap coverage to your existing policy. Note that comprehensive and collision coverage are usually prerequisites for adding gap coverage to a car insurance policy.

In Texas, for instance, you can buy gap insurance from insurance companies like Allstate, or financial institutions like credit unions. Some credit unions that offer gap insurance include the Associated Credit Union of Texas, Greater Texas Credit Union, and Texas DPS Credit Union. It is worth noting that Texas law limits the cost of gap coverage to 5% of the loan amount.

When considering where to buy gap insurance, it is beneficial to compare rates and coverage options from different providers, including both auto insurers and dealerships, to find the most suitable and cost-effective option for your specific needs.

Frequently asked questions