Guaranteed Auto or Asset Protection (gap) insurance provides helpful protection against out-of-pocket costs when you lease a car or buy a car through a lender. If your vehicle is totaled, primary auto insurance can lead to a gap between what you receive and what you owe the lender or leasing company. Not all insurance companies offer gap insurance, but most do. In this article, you will learn how gap insurance works, where to buy it, why you should buy it, and how you can save money when purchasing the policy.
What Is Gap Insurance?
Gap insurance is a type of auto insurance designed to fill the gap between what your primary car insurance pays for a stolen, unrecovered car or total loss and what you owe to your lender. This policy is essential if you have just bought your vehicle through a car loan.
The standard collision and comprehensive coverages only pay the car’s actual cash value at the time of the loss, regardless of what you owe on your lease or loan. New vehicles tend to depreciate rapidly, and buyers often find themselves owing more than the vehicle is worth. As a result, you end up having a lump sum amount of money to pay when a car is totaled.
How Gap Insurance Works
Gap insurance is not mandatory in the U.S., but most leasing companies will require you to have it. Car dealerships also sell gap insurance to ensure you don’t strain to pay off the entire amount you owe if your car is totaled.
If your car is totaled or is stolen and authorities are unable to locate it, you can check to determine whether the amount you receive is enough to settle the amount you owe to your lender or not. Contact your gap insurance provider if there is a gap between what you receive from your insurance company and what you owe. They will review your claim and pay the remaining amount owed up to your maximum policy limits.
For example, you bought a car for $25,000 and owe $20,000 on the loan. One morning, you wake up and discover that your vehicle was stolen. You’re unable to recover it, so you call your insurance company to file an insurance claim. Your insurance company gives you $15,000, leaving you with a $5,000 deficit. If you have gap insurance, this coverage will offset the additional $5,000.
Where Can You Buy Gap Insurance?
Whether through total loss or theft, losing your car is devastating enough. Gap insurance helps reduce the risk of owning more than your insurance pays for your lost vehicle. If you’re looking to buy gap insurance but unsure where to start, here are a few options.
1. Your Insurance Company
The first place you want to look at when buying gap insurance is your insurance company. Most auto insurance companies offer gap insurance as optional coverage. It is much easier to work with one company for all your auto insurance needs. If your insurance provider doesn’t offer gap coverage, you can compare a few quotes from different insurance companies to ensure you’re getting the most out of your money.
2. The Dealership
If you lease or buy your vehicle from a dealership, you’ll likely be presented with the option of purchasing gap insurance. Dealers often suggest you buy from them for various reasons, such as maintenance and easier follow-ups if the vehicle develops issues along the way. While this may have numerous benefits, it’s always prudent to shop around to make sure you’re getting the best coverage at the best price.
3. Buy Online
Many gap insurance providers list their offerings online. If you’re interested in buying insurance from a specific company, you can check whether you can get the coverage online. While insurance laws vary from state to state, you can inquire about the process before you begin the purchase.
What Does Gap Insurance Cover?
Gap insurance is quite versatile, but it is essential to understand that it can only be used if the vehicle is stolen or damaged beyond repair in a crash. Problems such as engine failure are not covered. You will need to check in with your dealer and consult your auto insurance company if you experience such issues.
Remember, auto insurance doesn’t cover wear and tear. Gap insurance will not reimburse you if the engine failure is caused by normal wear and tear. It’s also imperative to understand that gap insurance doesn’t cover deductibles. You will still need to pay your deductibles in the event of an accident.
Why Should You Consider Buying Gap Insurance?
Whether you need to buy gap insurance or not heavily depends on your situation. In most cases, you will need gap insurance when you lease a vehicle. Think about what you would do if you didn’t have the coverage and your car was totaled or stolen. You want to consider the depreciation rate as it determines whether there will be a gap or not.
While depreciation varies based on the car model, make, year, use, and maintenance, new vehicles are likely to lose around 60% of their value over the first five years. For this reason, you might want to keep gap insurance until the amount you owe your lender is equal to or less than the vehicle’s value.
You can also assess the level of crime in your neighborhood to determine the likelihood of your vehicle being stolen. Your driving history is also a critical factor affecting your need for gap insurance.
Gap insurance is a critical coverage that every driver should consider, especially if you are leasing or buying a car through a loan. The amount of gap insurance you buy heavily depends on the value of the car and its depreciation rate. To avoid chances of losing your vehicle in a serious accident or theft, make sure to take the necessary precautions, such as taking driving classes to improve your driving skills, as well as improving safety around your home.
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.