What Is Gap Insurance? Bridging the Value-to-Loan Coverage Gap

What is Gap Insurance? It is a specialized auto coverage that comes into play if your car is deemed a total loss. It covers the difference between the car’s current market value and the amount you still owe on your loan or lease.

Key Takeaways

  • Gap Insurance is especially useful if your car’s value is less than what you owe, typically occurring if there was no down payment made or if the loan term chosen is extended.
  • The price is variable, being influenced by your location, your driving history, and the type of vehicle you own.
  • It can be added to your existing car insurance as an endorsement or procured separately through the dealer.
  • Gap Insurance is advisable to compare the pricing of adding it to your current policy versus buying a separate one from the dealer to discern which is more economically favorable for your circumstances.

What Is Gap Insurance?

Gap insurance is special car insurance that helps you out if you crash your car and the payout doesn’t cover what you still owe on your loan or lease. Essentially, if your car is worth less than what you owe, gap insurance can make up the difference.

What Is Gap Insurance?

What does This Insurance Cover?

When your car is stolen or totaled, there’s often a gap between what you owe on it and its current market value. While comprehensive and collision insurance cover damages up to the car’s current value, they don’t account for the outstanding loan or lease amount. 

Gap insurance fills in this difference, ensuring you’re not out of pocket for the amount you still owe on the vehicle.

What Doesn’t It Cover?

Here are some expenses gap insurance doesn’t cover:

  • Your car insurance deductible.
  • Missed payments or late fees on your car financing.
  • Security deposits.
  • Extended warranties.
  • Balances transferred from old loans or leases.
  • Penalties for overusing or surpassing mileage on leases.
  • Costs for credit insurance tied to the loan.
  • Down payments for a new vehicle.

How does Gap Insurance Work?

Imagine your new car, worth $25,000, gets stolen. Yet, you still owe $30,000 on it. Your comprehensive insurance will cover the car’s value at the time of theft, minus a $500 deductible. So, the insurance pays $24,500 to your lender. This leaves a gap of $5,500 unpaid on your loan.

How does Gap Insurance Work?

Here’s where gap insurance comes in. It covers that $5,500, ensuring you don’t get stuck with the bill for a car you no longer have. Without it, you’d be on the hook for both the loan balance and the deductible.

Remaining Loan Amount$30,000
Car’s Current Value$25,000
Deductible for Comprehensive Insurance$500
Amount Insurance Pays to Lender$24,500
Remaining Loan Balance After Insurance Payout$5,500
Out-of-Pocket Cost With Gap Coverage$500 (deductible)
Out-of-Pocket Cost Without Gap Coverage$6,000 (deductible + remaining loan balance)

How to Get Gap Insurance

Gap insurance can be added to your policy only if you still have outstanding payments on the vehicle. Here are the prerequisites:

  • The car should be between two to three years old.
  • You must be the original owner of the vehicle.

There are two primary methods to acquire this:

  • Through your Auto Insurer: As part of your regular insurance policy.
  • Via the Dealership or Lender: This gets added into your loan payments. Be cautious here, as you’ll pay interest on the gap insurance cost over your loan’s duration, making it pricier.

Tips if you buy from a dealership or lender:

  • Verify if your loan contract mandates gap insurance. Not all do.
  • If leasing, dealers might automatically add gap insurance. Review your lease agreement.
  • If you opt to switch from dealer-offered gap insurance to an insurer-provided one, ensure there’s no coverage gap during the transition.

Pros & Cons of Gap Insurance

Pros & Cons of Gap Insurance

Pros of Gap Insurance:

  • Financial Protection: Covers the difference between the car’s value and the remaining loan amount, preventing out-of-pocket expenses in case of total loss.
  • Peace of Mind: Reduces stress knowing that the full loan amount will be covered, even if the car’s actual cash value is less.
  • Affordable Premiums: When purchased through car insurance providers, gap insurance tends to be relatively inexpensive.
  • Essential for Long-term Loans: Especially beneficial for those with long-term car loans where the balance might exceed the car’s value for a while.
  • Beneficial for Leased Cars: Leasing companies often require or recommend gap insurance since leased cars can often have a gap.

Cons of Gap Insurance:

  • Not Always Necessary: If you’ve made a substantial down payment or your car loan is short-term, the need for gap insurance diminishes.
  • Cost Variability: Purchasing gap insurance from dealerships can be significantly more expensive.
  • Duration Limit: As the gap between the owed amount and the car’s value decreases, the utility of the coverage lessens, but you might still be paying for it.
  • Coverage Limitations: Doesn’t cover other costs like the deductible, overdue payments, or non-financing related charges.
  • Can Increase Loan Amount: If added to an auto loan, it increases the total amount borrowed, potentially resulting in paying interest on the gap insurance itself.

Cost of Gap Insurance

Gap insurance averages $61 annually, as per Forbes Advisor. 

It’s often more cost-effective to get the insurance from a car insurance company than a dealership. Though dealerships may offer convenience, they can charge up to $600 for gap insurance, as noted by Trusted Choice. 

Including gap insurance in your car loan means paying interest on it and reducing flexibility. Once it’s tied to your loan, canceling becomes difficult, possibly resulting in unnecessary expenses.

Cost of Insurance’s Gap by Company

CompanyAverage annual cost
Auto-Owners Insurance$48
American Family$51
State Auto$52

Examples of When To Consider Gap Insurance

  • Minimal Down Payment: If you finance a car with little or no down payment, the loan often exceeds the car’s value as soon as you drive off the lot.
  • Trading in an Owed Car: Trading a car you still owe money on? Dealers might add the owed amount to your new car loan. This can be problematic if your car gets totaled or stolen.
  • High Mileage Plans: If you’re planning to drive a lot, the car’s value drops fast. Your loan may remain higher than the car’s worth for a while.
  • Long-Term Loans: Loans that extend beyond 60 months take longer to balance with the car’s value.

Alternatives to Gap Insurance

Certain car insurance providers offer coverages that resemble insurance’s gap. Here are two potential alternatives to consider.

New Car Replacement Coverage

New car replacement coverage provides funds to replace your totaled or stolen vehicle with a brand-new one. Unlike standard policies that consider depreciation (actual cash value), this coverage ignores that depreciation. To qualify, your car needs to meet certain age and mileage criteria. Typically, a deductible applies to this coverage.

New Car Replacement Coverage

Here are examples of companies offering this coverage:

  • Amica:
    • Offers new car replacement as part of its Platinum Choice Auto package.
    • Replaces totaled vehicles with new ones if under 1 year old and with less than 15,000 miles.
  • Farmers:
    • Provides new car replacement for the same make and model.
    • Applicable if the car is totaled within the first two model years and 24,000 miles.
  • Nationwide:
    • Offers new car replacements for vehicles less than three years old.

Each company’s new car replacement coverage has its unique terms. It’s crucial to determine the details and know what you’re signing up for when considering this protection.

Better Car Replacement Coverage

Certain insurers, like Horace Mann and Liberty Mutual, provide “better car replacement” coverage. This means if your car is totaled, they’ll compensate you for a newer model or an upgrade. For instance, Liberty Mutual’s plan covers a car that’s a year newer and has 15,000 fewer miles than your totaled one.

Better Car Replacement Coverage

Gap Insurance: FAQs

Is Gap Insurance Mandatory?

Gap insurance isn’t mandatory, but your finance contract might necessitate it. Review your car loan terms to determine if this insurance is essential. For leased cars, the insurance might often be a requirement.

How Much Does Gap Insurance Cost?

Like other car insurance, your gap insurance cost can differ based on your location, driving history, age, vehicle, and more. You might be able to include gap insurance to your existing policy as an additional feature.

Can I Cancel Gap Insurance?

To cancel, reach out to your insurance provider. While there might be a cancellation fee, you’ll likely receive a pro-rated refund for the duration you’ve had the coverage. However, if you purchased the gap insurance via a dealership and it’s included in your car loan, cancellation might not be an option.

Can you Get The Insurance After you Buy a Car?

You can secure the insurance after purchasing a car, but typically within a 30-day window of leasing or financing it. Additionally, lenders usually mandate collision and comprehensive coverage. Collision covers damages from hitting another vehicle or object, while comprehensive handles theft and damages from events like fires or floods.

When does Gap Insurance Not Pay?

Gap insurance only covers totaled vehicles, not repairable damages. It’s solely for your vehicle and doesn’t cover damage to others’ property or injuries. Other sections of your car insurance address those concerns.

The Bottom Line

Gap insurance is an optional car insurance that covers the difference between what you owe on your car loan or lease and its actual cash value. If your car is totaled, this insurance pays the “gap” between your insurance payout and the remaining loan balance.

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