Buying a car can be both stressful and exciting. There are so many options that when you find the perfect one within your budget, there’s no better feeling. If you choose to finance your car, then there are a few things you need to consider when it comes to Car Insurance. This includes the type of coverage that’s right for you and your new-to-you vehicle. Gap Insurance is an optional coverage that you should definitely considering adding to your policy. We explain what it is and why you might need it below.
Gap Insurance Explained
The “gap” in Gap Insurance stands for Guaranteed Auto Protection. This type of protection covers you in the event that your car is stolen, totaled or destroyed and deemed a total loss. Gap Insurance is intended to cover the monetary difference between what your car is worth and what you still owe on your loan.
Gap Insurance is only beneficial to you if you have Comprehensive and/or Collision coverage on your Auto Insurance policy AND:
- You have taken out a loan to pay for your car (instead of paying cash for it)
- You are leasing your car instead of purchasing it
It’s important to note that you cannot add Gap Insurance to your policy if you only carry Liability Insurance and not Comprehensive and/or Collision coverage, as well.
Real World Scenario
To help you better understand Gap Insurance, consider the scenario below.
Buying the Car
Let’s say you purchase a $37,000 car at 0% financing (for ease of calculations) that you will pay off over a period of 5 years. You also make a $7,000 down payment and finance the rest with your bank. Therefore, on the day you drive the car off the dealer’s lot, you owe $30,000 total.
Being a savvy Auto Insurance consumer, you immediately purchase Comprehensive Insurance coverage for your new car in addition to your state’s required Liability Insurance. While you’re on the phone with your agent, they mention the benefits of Gap Insurance and you decide to add it to your policy. It’s only a few dollars extra per month and you’ll have better peace of mind that you’re financially covered in the case your car gets stolen or totaled.
As do all cars, yours starts to depreciate as soon as you drive it off the lot at a rate that is completely unrelated to your payment schedule. In fact, many cars are literally worth a few thousand dollars less the minute you take them home.
Current Market Value
Now, let’s fast forward 2 years ahead from the day you bought your car. You’re up-to-date on your payments, which means you still owe $18,000 on your car. However, let’s assume that the market value of the two-year old version of your car is only worth $15,500 on the open market.
Without Gap Insurance
Then, one day, you park in a shady neighborhood and your car gets stolen. You call your agent to make a claim. They explain that your Auto Insurance only covers the current market value of your car, which is $15,500. You tell them that you owe more than that on your car loan.
With Gap Insurance
Luckily, you also have Gap Insurance coverage on your policy. That means your insurance company will also pay you the additional $2,500 which you can use to pay off the rest of your loan. All you have to do is pay for the deductible on your Comprehensive Insurance.
Do You Need Gap Insurance?
Generally speaking, it’s a good idea to carry Gap Insurance on your policy if:
- You’re financing your car for 5 years or longer
- Your down payment is less than 20% of the purchase price
- You drive over 15,000 miles a year
- The car you buy is known for depreciating rapidly
Gap Insurance is also important if you choose to lease a vehicle instead of buying it. In fact, the leasing company may require you to buy Gap Insurance as part of the lease agreement. This is because your monthly payments are much less than they would be if you purchased it, thus increasing the “gap” between the car’s value and what you owe on the lease.
How Much Does Gap Insurance Cost?
If you fell into any of the categories above and are interested in adding Gap Insurance to your policy, we have some good news. Gap Insurance usually doesn’t cost that much, falling around $5-10 more per month. Additionally, you only need to carry this coverage until you pay off your car loan or lease agreement.
However, you should note that Gap Insurance is usually much more affordable when you purchase it from your insurance company and not the auto dealer or leasing company. For some of the most affordable coverage options, speak with an Insurance Specialist at (855) 919-4247. Or, head online to our website for a free quote in minutes.
This content is offered for educational purposes only and does not represent contractual agreements. The definitions, terms and coverage’s in a given policy may be different than those suggested here. Such policy will be governed by the language contained therein. No warranty or appropriateness for a specific purpose is expressed or implied.