If you’ve ever purchased or leased a brand-new car, you’ve probably heard of GAP insurance. If you usually buy your vehicles used, they might not mention this kind of insurance at the dealership. GAP insurance protects you financially when you owe money on a vehicle that has depreciated to a value that is less than what you owe. Many car buyers may ask, is GAP insurance required? The short answer is not usually, so keep reading to see when you should and shouldn’t get GAP insurance.
What Is GAP Insurance?
Guaranteed Asset Protection (GAP) is a type of insurance that covers any difference between the amount of money you owe on a car and how much the car is worth. Basically, GAP protects you against depreciation in the event that your car is totaled or stolen.
When you purchase a new vehicle, it depreciates as soon as you take it off the lot. In many cases, it can depreciate up to 20% in the first year you have it. If you take out a loan to cover the entire cost of the new vehicle, you may find yourself in a position where you owe your lender more than what the car is worth.
In the event that your vehicle is a total loss after an accident, the insurance company will only pay out for the car’s fair market value. This could leave you with a large out-of-pocket expense. GAP insurance will cover the difference between what you owe and what the insurance company will pay.
Is GAP Insurance Required?
Unlike minimum insurance coverages, there are no state requirements for drivers to have GAP insurance. That being said, some lenders may require a GAP insurance policy, and some lease companies might already roll the GAP policy into your contract.
When Should I Purchase Gap Insurance?
Even if a GAP insurance policy isn’t required by your lender or lease company, it can still be beneficial to opt for such a policy if you fall under one of the following situations:
- Made a down payment of less than 20% on a new vehicle
- Take out an auto loan for 60 months or longer
- Lease a vehicle. Many lease contracts include GAP insurance. Check your contract to see if you already have coverage.
- Roll over a loan. If you owe more on an existing loan than what your car is worth when you get a new or used car, GAP insurance will help protect you from the negative equity.
- Buy a car that will depreciate quickly, such as a luxury vehicle or a sports car
- Put a lot of miles on your car in a short period of time, which speeds up depreciation
Who Does Not Need GAP Insurance?
There are some circumstances where GAP insurance doesn’t make sense. Some of these include if:
- You buy your car outright. If you pay for the entire cost of the vehicle up front, there’s no gap between what you owe and what the car’s worth.
- You put down a large down payment. The size of a down payment affects the amount of your loan. If you put a large sum of money down, you’ll be able to take out a smaller loan. A smaller loan means a smaller gap or no gap at all.
- You buy a car that holds its value well. While some vehicles depreciate faster than others, others will actually appreciate such as low-production and collector cars.
How Much Does GAP Insurance Cost?
The cost of GAP insurance varies depending on the insurer, but it’s usually not very expensive. You can get it for just a few dollars a month, or about $20 for the entire year. Some lenders will charge a flat fee for the coverage, which can range from $500 to $700.
Many car dealerships offer GAP insurance, but it’s usually more expensive if you purchase it from the dealer. If you decide to buy it from the dealer, the premium is often rolled into your car loan, which means you’ll end up paying interest on the insurance.
There are three different ways you can purchase your gap insurance.
- From your current auto insurance company. Not every auto insurance provider sells gap insurance, so you might have to look elsewhere if your current provider doesn’t offer it.
- From an insurance company that exclusively sells gap insurance. Stand-alone gap insurance companies, such as EasyCare, allow you to purchase coverage online.
- From the dealership or lender. It’s often more expensive through the dealership. The dealership might automatically add it, so check your contract and remove it if you plan to purchase it elsewhere.
How Long Does GAP Insurance Last?
Once you purchase GAP insurance, it will last for the entire duration of your policy. Since GAP insurance isn’t required, and you won’t need it for the entire time you own the vehicle, you’ll want to keep track of what you owe on your vehicle compared to what it’s worth.
After you get to a point where you owe your lender less than the current value of the car, you can cancel the GAP insurance. It won’t cancel automatically, so make sure you call or complete the paperwork to cancel it so you don’t end up paying for coverage you no longer need.
What Doesn’t GAP Insurance Cover?
GAP insurance is a very specialized type of insurance. It doesn’t cover:
- Auto insurance deductibles
- Extended warranties
- Late fees or overdue payments on a loan or lease
- Security deposits
- Lease penalties for excessive use or extra mileage
- Down payments for a new vehicle
So, the general answer to the question, “Is GAP insurance required?” is no. It’s not legally required, but your lender or the leasing company may require you to purchase it. It’s also a good idea to carry GAP insurance for the financial protection it offers. Once you no longer need the coverage, it’s easy to cancel, and you might even get a small refund.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.