Many things will determine if gap insurance is worth it for you, including the cost, coverage options, available providers, whether you qualify, and other factors. Although fairly inexpensive, gap insurance is a particular type of coverage used only when a new vehicle you’ve financed is totaled or stolen. So is gap insurance the right choice?
What Is Gap Insurance?
Guaranteed Asset Protection or gap insurance is supplemental coverage, in addition to your comprehensive and collision coverages, that pays the difference between your car’s actual cash value, or “ACV,” and the amount you currently owe on your loan or lease when your car is totaled in a traffic accident or stolen, according to Investopedia.
For example, suppose you financed or leased a new vehicle and your vehicle is totaled within a year. At the time of the accident, your car’s ACV is $10,000, but you owe $13,500 on your loan. After your deductible of $500, gap insurance covers the $3000 discrepancy. Although uncommon, some gap policies will also cover your deductible.
Do You Need Gap Insurance?
Per TheBalance, if you are unsure if gap insurance is right for you, consider these criteria:
- Do you owe more on your auto loan than your car is worth?
- Did you make a small down payment or put nothing down for your new car?
- Did you take out a loan with a term longer than two years?
- Do you drive more than the average person in your area?
- Are you leasing your car?
- Does your car depreciate faster than other cars?
If one or more of these common situations apply, gap insurance may be the right decision. If your vehicle’s value drops below what you owe on your loan, you won’t need to purchase gap insurance and should cancel it if you already have it.
Gap insurance may not be necessary if any of the following apply:
- You made a down payment of at least 20 percent of the car’s value at the time of purchase.
- You expect to pay off your car loan in less than five years.
- You financed or leased a vehicle that holds its value longer than most.
Getting Gap Insurance
There are several ways you can purchase gap insurance. According to NerdWallet, you can purchase your gap insurance through your insurance provider as an add-on coverage, through an insurance company that provides gap insurance for a one-time fee only, or your dealership or lender may provide gap insurance through your loan payments.
According to Nationwide, many lenders and dealerships require gap insurance and will include it in the lease or loan price. However, this usually costs more in the long term because you will be paying interest on your gap insurance. Gap insurance on its own is often bought online as a one-time purchase. You usually can’t buy gap insurance if your car is more than three years old or if you are not the original owner, though exceptions do exist.
Most insurance providers require you to have both collision and comprehensive coverages to purchase a gap policy. You most likely have collision coverage if you are still paying off your auto loan, and most companies require collision insurance when leasing a vehicle.
What is The Cost of Gap Insurance?
The cost of your gap insurance depends on several factors. If you get your gap coverage from a lender, you can expect to pay a flat fee of $500 to $700 on average. If you finance through a credit union, though, it may be less expensive, but you will pay interest on your insurance with a credit union. Experian found that auto insurers usually charge $20 to $40 a month for their add-on policies.
These are the variables that determine your gap insurance costs:
- The actual cash value of your vehicle when you purchase your gap policy.
- Your age.
- Where you live.
- Your previous claims history.
Gap Insurance Providers
Talk to your insurance provider about their gap insurance options. If your insurance company doesn’t provide gap coverage, you may need to contact another insurer for stand-alone gap coverage.
Here are some major insurance companies offering gap insurance:
- State Farm
- Auto-Owners Insurance
- American Family
- Liberty Mutual
Other insurers sell gap insurance or comparable products as part of a lease or auto loan. You can purchase gap insurance from State Farm if you are financed directly through their bank, but you can not get a regular auto policy this way.
Gap insurance isn’t the only type of coverage for totaled or stolen vehicles. If you cannot find gap insurance or it doesn’t seem to be the right coverage for you, check out loan or lease payoff coverage or new car replacement coverages.
Loan or lease payoff insurance is a gap insurance alternative that may be available for used cars. While gap insurance only covers new vehicles, loan or lease payoff insurance pays a preset percentage of the vehicle’s ACV, typically around 25 percent, in addition to the claim payout from your comprehensive or collision coverage. If you owe more on your loan than your car is worth, make sure the amount you would receive from this type of insurance is greater than or equal to the remaining balance on your loan or lease after a claim.
Here are some popular insurers who carry loan or lease payoff insurance:
If you would rather purchase a new vehicle than pay off your old one, new car replacement insurance is the right choice. New car replacement insurance will pay some or all of the costs to replace a vehicle of the same make, model, and year as the totaled or stolen car. New car replacement is similar to gap insurance in that it is typically only available for new cars.
Here are some major companies offering new car replacement insurance:
- Liberty Mutual
- Shelter Insurance
You can receive quotes for gap insurance on its own or find rates for gap insurance as a part of your full coverage policy. While many insurers offer gap insurance with their regular auto policies, most do not, so shop around and get the right insurance at the right price today!
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