What exactly is gap insurance, and why should I get it?

Gap insurance covers the difference between the value of your car and the amount you still owe on it. Gap is a type of car insurance covering the "gap" between what you are still owing on a lease or loan and the payment your automotive insurance company made when a car is stolen or totally destroyed. Gap is an abbreviation for "guaranteed auto protection."

Your creditor or lienholder may require you to add gap insurance to your car insurance policy. However, even if gap insurance is not required, it may be a good way to recoup as much as possible from a loss, especially if you are “under water” on your loan.

Adding gap insurance is a relatively low-cost option. Take the amount you already pay for collision and comprehensive insurance and multiply it by 5%.

Continue reading to learn more about gap insurance:

What is the purpose of gap insurance?

The value of your new car begins to depreciate the moment you drive it off the lot. If you financed your car with an auto loan or leased it, the car's value will be slightly less than the sum of your lease payments or the principal balance on your loan. This means that your car insurance can only pay the actual cash value of your car if the vehicle is damageable in an accident or another type of hazard, or if it is stolen and not recovered, – which you paid for it minus the depreciation.

When the ACV is less than the amount owed on the lease or loan, you will continue to owe money to the lienholder or creditor for a car that you no longer own. This is also known as "negative equity."

Assume you paid $30,000 for a new car, including taxes and fees, and you put $1,000 down. After about a year, you are in an accident and your car is totaled. You file a claim with your insurance company under your policy's collision insurance and learn that your car is worth $22,000, its depreciated value at the time of the loss. Meanwhile, after a year's worth of payments, you owe $25,000, leaving you with a $3,000 "gap." If you have gap insurance, the car insurance company will pay you the remaining $3,000 in addition to the $22,000 it owes you.

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Consider how much you're spending each month to pay off your car loan before deciding whether you need gap insurance. If the vehicle is down at a slower rate than your payments, you probably do not need gap insurance, which reduces the amount on your loan. If you borrow or lease money to buy a car, you may be required to purchase insurance under the financing agreement with your lienholder or creditor. Even if you are not required to purchase gap insurance, there are several reasons why you should.

You owe more on your car loan than it is worth.

This is also known as being “under water” or “upside-down,” and it can occur if you have missed payments, if your payments are too small to keep up with the rate of depreciation, or if your car is simply too new.

You made a small down payment on your loan.

If you lower your car by less than 20% and take a lending charge over a period of four years, at least for the first two years of your loan, you generally owe your car more than its present value.

You have financing for the long term.

Because the payments are spread out over a longer period of time, you can make lower payments with long-term financing. While this means you'll be able to afford the car sooner, it also means your car will depreciate faster than your payments can compensate for.

You will not be able to pay the "gap" out of your own pocket.

If your car is totaled or stolen, you may not be able to continue making payments to the financial institution that extended you your loan.

You travel over 15,000 miles per year.

Excessive driving causes your car's value to depreciate faster than similar cars that aren't driven as much.

Your car depreciates more quickly than others.

Some cars retain their value better than others, so it is worthwhile to investigate the rate of depreciation of your vehicle. Higher-end vehicles may be particularly vulnerable to increased depreciation because they are valued for their newness and sheen.

It is more likely that your car will be stolen.

Because comprehensive insurance covers theft, you most likely already have it for your popular vehicle. Gap insurance increases your comprehensive coverage to the value of the car before depreciation.

What exactly does gap insurance cover?

Gap insurance is an addition to your property claims, which includes a collision and a full auto insurance coverage. Collision coverage of your car damage resulting from a collision with another vehicle, whereas comprehensive insurance covers damage to your car caused by other perils such as severe weather or malicious human activity. In the event of a total loss, those two types of car insurance will pay up to the ACV of the vehicle, with gap insurance covering the remainder. A licenced representative at Insurezio.com can help you find an affordable auto insurance policy that includes collision, comprehensive, and gap insurance.

Gap insurance has limitations.

Some car insurance companies may, on occasion, limit the amount of "gap" they will pay off. For example, suppose your insurer's maximum gap coverage is 25% of the ACV. If you purchased the car for $20,000 and it has depreciated to $10,000, you will only be eligible for $12,500 in reimbursement after a total loss, minus the deductible.

When purchasing gap insurance, make sure you speak with the carrier to ensure you're getting the right amount of coverage. Your insurer may provide a higher limit in exchange for a higher premium, but what each insurer provides and in which states it is available varies.

What is not covered by gap insurance?

Because gap insurance only covers the physical loss of your vehicle, it does not cover expenses such as medical bills or third-party liability. The other components of car insurance in your policy extend those coverages.

Medical Bills

Any type of bodily injury is not covered by gap insurance. The medical expenses of someone you injure in a car accident are covered by your bodily injury liability coverage. If the person you hit dies, it will also cover funeral expenses. When no one is at fault in an accident, personal injury protection (PIP) or MedPay coverage from your car insurance will pay your medical bills or those of your passengers.

Property damage to someone else's property

Your property liability insurance will cover this. Your gap insurance will not cover the difference between how much someone else owes on their own property and how much you owe on your own.

Repairs

Gap insurance does not cover mechanical repairs, such as engine failure. Gap insurance only covers the difference between how much you owe on a car loan and how much you owe if the car is totaled.

Collision and Comp deductible

Collision and comprehensive insurance each have a deductible, which is the amount you must pay out of pocket on a given claim before the insurer pays the rest of the claim. Gap insurance does not have a deductible, but it will not pay the deductible for your collision and comprehensive coverage.

When the car is not a total loss, depreciation occurs.

Assume you are involved in a serious accident. Your car insurance will cover the repairs, and you will be able to drive the vehicle again. While the accident may cause the car to depreciate even further and increase your negative equity, your gap insurance will not kick in unless the car is completely totaled.

What is the cost of gap insurance?

Gap insurance costs an extra 5% of your total comprehensive and collision bill per year.

Collision and comprehensive insurance account for roughly 60% to 70% of your premium. If you pay $1,000 per year for car insurance, $700 may go toward collision and comprehensive coverage. In this case, gap insurance would cost an extra $35 per year, for a total premium of $1,035. (If $700 for property damage coverage seems excessive, consider raising your deductible, which will reduce your premiums but expose you to more risk if your car is damaged.)

Gap insurance may be significantly more expensive if purchased through your dealership, so check the price with the auto insurer with whom you already have coverage. Going this route also simplifies the claims process.