What Is Gap Insurance And How Does It Work?

What Is Gap Insurance?


Gap insurance is an optional type of car insurance that helps drivers who owe more on their car loan than the car is worth if their car is totaled.


 
How Does It Work?


If your car is totaled in an accident covered by collision or comprehensive insurance, your insurer’s maximum claim payout is the vehicle’s worth at the time of the accident.
 
The difference between what you owe and the value of your totaled or stolen vehicle is covered by gap insurance, often known as loan/lease coverage.


The last thing you want to hear if your automobile is totaled or stolen is that you owe more on your car loan than the car is worth.


If you have collision or comprehensive insurance, your automobile insurance company will pay a complete loss payout for the value of your car, not the amount you owe on a car loan or lease. Difference insurance, on the other hand, can help you bridge the gap if you owe more on your automobile than it’s worth.
 

 
You file a claim on either the collision or comprehensive insurance section of your policy if your automobile is stolen or totaled in an accident covered by your car insurance (whichever coverage applies).


Your car insurance company will pay you the ACV (actual cash value) of your vehicle, less your deductible. Your insurance payment would be $16,500 if your automobile is worth $17,000 and you have a $500 deductible.


Gap insurance will pay the difference if you owe more on your loan or lease than the insurance payout for the value of your car.


If you don’t have gap insurance and your loan or lease balance exceeds the value of your car, you’ll be responsible for paying it off alone. Gap insurance may be required by some lenders or leasing firms. This is because it protects them from buyers who back out of a loan or lease when the vehicle is totaled or stolen.
 
Some gap insurance policies may cover the whole loan balance, including any negative equity rolled into your new car loan. Negative equity is incorporated into your new loan if you trade in an automobile for which you owe more than it’s worth. However, not all gap insurance policies cover negative equity, so if you rolled negative equity into your new car loan, make sure you choose a policy that does.


 
What Isn’t Covered by Gap Insurance?


Gap insurance does not cover the following expenses:

  • The amount of your vehicle insurance deductible
  • Late fines and overdue payments on your auto loan or lease
  • Security deposits are required.
  • Extended warranties are available.
  • Balances leftover from earlier loans or leases.
  • High mileage or excessive use can result in lease penalties.
  • Charges associated with credit insurance on the loan
  • A deposit on a new vehicle
  • Is Gap Insurance Required?
  • The amount of time you have left on your automobile loan or lease, as well as the value of the vehicle, determine whether you need gap insurance.


 
Here are some frequent scenarios in which gap insurance may be useful

  • Your vehicle is leased to you.
  • You took out a five-year (60-month) or longer car loan.
  • You financed the majority of the car and put down a small down payment of less than 20% on it.
  • Your previous auto loan’s negative equity was transferred into your current car loan (make sure you get a policy that covers negative equity).
  • You purchased a vehicle that depreciates more quickly than others (more on that below).
  • If you currently have a car loan or lease, you can use a website like NADAguides to compare the value of your car to the balance of your loan or lease. The gap is the distinction between the two.


 
However, once the amount you owe is equal to or less than the value of your car, there’s no incentive to have gap insurance. Because there will be little or no gap insurance payout available, this is the case. If you owe $15,000 and your automobile’s ACV is $17,000, for example, there will be no difference if your car is totaled or stolen.
 
You should also cancel your gap insurance if you sell your car.
 
I’m looking for gap insurance, but I’m not sure where to get it.
Gap insurance is generally purchased from:
 
Insurance companies for automobiles


Automobile dealerships

Gap insurance isn’t sold by every vehicle insurance provider, and it’s not available in every state. Geico, for example, does not sell gap insurance.
 
Gap insurance is sold by insurance companies.
Gap insurance is available from a variety of car insurance carriers, including:
 
Allstate
Auto-Owners
Erie
Nationwide
Travelers


What Does Gap Insurance Cost?


The Insurance Information Institute says that, on average, gap insurance adds about $20 to your annual premium.
 
You can also remove gap insurance from your policy when you no longer require it, such as when your loan debt is equal to or less than the value of your vehicle.
 
When compared to a car dealership, gap insurance from a car insurance provider is substantially less expensive. Buying gap insurance from a car dealership may seem handy at first, but it will almost always cost you more in the long term. A group of independent insurance agents called Trusted Choice says that car dealerships often charge up to $600 for gap insurance.

Gap insurance costs can be rolled into your car loan, but you’ll have to pay interest on them as well. Because your gap insurance is attached to your loan, you won’t be able to cancel it, which means you could end up paying for something you don’t need.

Gap Insurance Alternatives

Other types of coverage that sound similar to gap insurance are offered by some vehicle insurance carriers. Here are two gap insurance alternatives that you might be interested in.

Replacement coverage for a new car

If your car is destroyed or stolen, new car replacement coverage will pay for you to get a new one.

If you have this coverage, your insurance provider will reimburse you for the cost of replacing your new vehicle rather than give you the vehicle’s real cash value, which takes into account depreciation. To be eligible for new car replacement coverage, your vehicle must meet certain age and mileage restrictions.

In most cases, new automobile replacement coverage comes with a deductible.

Amica: Amica’s Platinum Choice Auto package includes new car replacement coverage. If a totaled vehicle is less than a year old and has fewer than 15,000 miles on it, Amica’s new car replacement coverage will replace it with a new car.

Farmers: If your automobile is totaled within the first two model years and 24,000 miles, Farmers will replace it with a vehicle of the same make and model.

Nationwide: If your car is less than three years old, Nationwide will replace it with a new one.

As you can see, new car replacement coverage varies greatly by the provider, so study the fine print and make sure you know precisely what you’re getting if you want new car replacement coverage.

Better coverage for automobile replacement

Horace Mann and Liberty Mutual, for example, provide better car replacement coverage. This compensates you for upgrading to a newer or better model of your totaled vehicle. There may be mileage restrictions with this coverage.

Liberty Mutual’s superior car replacement program reimburses policyholders for a car that is one model year newer and has 15,000 fewer miles than their current vehicle. Here’s an illustration. Assume a 2020 vehicle with 30,000 miles is totaled. This coverage would cover the cost of a 2021 model of an identical automobile with 15,000 miles on it for the insured.

Only policyholders who own their car are eligible for the optional coverage. It does not apply to leased vehicles.

Is Gap Insurance a Good Investment?

If you owe much more on your auto loan or lease than the vehicle is worth, the relatively low cost of gap insurance from an insurer may be worth it.

You may elect to forego gap insurance if you have enough money to not be concerned about the “gap.”

If your automobile is currently worth $10,000 and you owe $12,000 on the loan, for example, you may be ready to absorb the difference if it is totaled. However, if you have a $30,000 vehicle loan on a $22,000 car, you may not be able to cover the $8,000 difference. In this instance, gap insurance might be worthwhile.

Depreciation of your vehicle may influence your gap insurance decision.

Gap insurance becomes a better bet if you have acquired a car that depreciates swiftly in value and you have a significant auto loan. According to iSeeCars’ 2021 study of over 800,000 car transactions, the average car depreciates by 40.1 percent after five years.

The Nissan LEAF has lost the most value over the last five years, with a loss of 65.1 percent. Karl Brauer, an executive analyst at iSeeCars, says this is because the range and battery life are getting better and better so quickly that electric cars are becoming obsolete.

“Government incentives like the $7,500 federal tax credit also contribute to the LEAF’s steep depreciation,” Brauer said in a statement.

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