Gap insurance can be a valuable tool that new car owners can use to protect themselves against surprises. Keep reading to learn what you need to know about gap insurance to decide if it’s right for your situation.
What Is Gap Insurance?
Simply put, gap insurance is meant to financially protect you in the early years of your vehicle’s life when its value is depreciating at its fastest rate. A problem that may arise from this is that if you paid too small of a down payment or your monthly payments are too low, you could end up owing more on your new vehicle than the vehicle is worth in just a year or two.
Standard collision and comprehensive car insurance plans help you pay for the cost to repair or replace your vehicle. However, their limits are set by the actual cash value of your vehicle. So, if your vehicle depreciates faster than you can pay off your loan and you total your car, your standard insurance plan may not give you the money you need to pay off the loan entirely.
Gap is an acronym that stands for guaranteed asset protection. Gap insurance covers the difference, or “gap,” leftover when the actual cash value of the vehicle is subtracted from the amount the driver still owes on it.
Something important that you should keep in mind before you opt for this coverage is that gap insurance only pays if the vehicle it’s attached to is considered a total loss, whether it’s totaled or stolen. A vehicle is considered a total loss if the cost to repair its damages exceeds the actual cash value of the vehicle. The actual cash value is determined by the insurance company.
Though gap insurance only covers this specific set of circumstances, it’s a “better to have it and not need it than need it and not have it” type of situation for many drivers. Gap insurance, on average, costs less than $10 per month to add to your insurance plan.
Who Needs Gap Insurance?
To figure out whether or not you need gap insurance for your vehicle, see if you can check off any of these boxes.
- You’re financing your vehicle for 60 months or longer.
- You’ve traded in a vehicle that was upside down on its loan.
- You financed your new vehicle with a small or no down payment, generally anything less than 20%.
- You’re leasing your vehicle.
- You’re going to put many miles on your vehicle in a short amount of time.
These are just a few of the situations in which you might consider purchasing gap insurance. But the best way to figure out if you should have gap insurance is to crunch the numbers to find out what would happen to you and your finances if your vehicle was totaled or stolen today.
Estimate the actual cash value of your vehicle using information from your car insurance provider and online services that tell you how much your vehicle is worth. Average these amounts and compare that number against the amount you still owe on your loan. If they’re somewhat comparable, you might not need gap insurance. But if you find that the remainder is an amount that would put you in an unfortunate financial situation, it may be time to consider gap insurance.
How Can I Get Gap Insurance?
You can generally get gap insurance in one of three ways: through your dealership, your insurance company, or your lender. Many, if not most, car insurance companies offer gap insurance that you can add to your collision and comprehensive coverage plans.
Be aware that many car insurance companies may have unique limitations on their gap insurance policies. Some require you to finance through them before you’re eligible for gap insurance. Some only offer gap insurance for new vehicles. The insurance company you’re considering should let you know fairly quickly whether or not your vehicle is eligible for gap insurance.
Some lenders will offer to charge a flat fee for gap insurance coverage rather than a month-to-month payment. These fees are hundreds of dollars depending on which lender you choose and, if added to your loan, you’ll pay interest on them. If you’re thinking of signing up for gap insurance, be sure to compare the costs of your dealership’s offer with your insurance company’s to make sure you’re getting the best deal available to you.
More often than not, gap insurance coverage is cheaper if you purchase it through an insurance company rather than a dealership. But that all depends on how long you plan to have gap insurance for your vehicle. If you would like to simply pay smaller monthly amounts for gap insurance until you’re comfortable with canceling it, go with the insurance company if you can.
What Is Not Covered by Gap Insurance?
There are some circumstances that gap insurance won’t cover. A good rule of thumb is that if another form of insurance covers it, gap insurance won’t. For instance, gap insurance doesn’t come into play when it comes to property damage and bodily injuries experienced by another party in an accident you’re involved in — that’s the job of liability insurance.
Other scenarios where gap insurance won’t cover include damages done to your vehicle are those that don’t end up with a total loss. This is true even if you’re not found at fault for the damages. This type of situation generally triggers another driver’s liability insurance or your collision or comprehensive insurance. Gap insurance only pays when your vehicle is considered a total loss.
How Long Should I Have Gap Insurance?
More often than not, you can cancel your gap insurance coverage at any time as long as you’re not required to have it by your lease or lending agreement. The most appropriate time to drop your gap insurance is when the amount you have left to pay on your loan is less than the total value of your vehicle. However, you might drop your gap insurance whenever you feel comfortable with the financial state you would be in if your vehicle is considered a total loss.
If you want to know more about the world of insurance, be sure to check the other resources in the blog section. One of the best tools to have in your mechanic’s toolbox is the knowledge of how to financially protect yourself from a world full of surprises.
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.
