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What Is Gap Insurance and Do I Need It? | Car Insurance Basics

    4 minute read

    Purchasing a new car is exciting—car depreciation, however, is not. For most of us, that new car we drive off the lot can lose up to 20% of its initial value during the first year of ownership. But what happens when disaster strikes and your new car is stolen or totaled? Collision and comprehensive insurance will payout your car’s actual cash value (ACV), or the amount it was worth immediately before the accident. But if you owe more on your auto loan than the vehicle’s worth, you’ll need to pay the difference out of pocket. That’s where gap insurance comes in.

    What is Gap Insurance and How Does it Work?   

    a person receiving the keys to their new car

    Gap insurance is an optional coverage meant to fill in the “gap” between your car’s actual cash value and what you still owe on a leased or financed vehicle after its been stolen or totaled. Also referred to as loan/lease coverage, gap insurance protects you financially from car depreciation, especially if you made a small or no down payment.

    To purchase gap insurance, you’ll first need comprehensive and collision insurance, which cover your vehicle. You cannot purchase gap insurance if you only have your state’s minimum auto insurance requirements because it is usually liability-only insurance, which does not cover your property. Some lenders may require you to carry gap insurance as a condition of your loan or lease.

    So, how does gap insurance work? Consider the following example: let’s say you financed a new car that is now worth $20,000 due to depreciation, but you have a remaining balance of $25,000 on your car loan, which is a $5,000 gap. If the vehicle is totaled in a covered car accident, your insurer will payout $20,000 (minus your plan’s deductible). With gap insurance, your insurer will also cover the remaining $5,000 left on your car loan. Without gap insurance, you’d be responsible for paying the $5,000 out of pocket.

    When Should I Purchase Gap Insurance?

    a person on the phone next to their damaged car

    Purchasing gap insurance may be worth it if:

    • You put less than 20% down towards your financed purchase. Cars depreciate quickly, so putting a small or no down payment makes it easier for your loan to turn upside down.
    • Your auto loan term is longer than five years. Longer car loan terms may lower your payment but ultimately cost you more over time in added interest. So you may be paying off a larger loan more slowly than the car is depreciating.   
    • Your leased/financed car is less than three years old. Newer cars depreciate faster than older cars.
    • Your annual mileage exceeds 12,000 miles. Cars with higher mileage are often worth less than those with low mileage. Gap coverage will protect you from increased depreciation.

    On the other hand, gap insurance may not be necessary if:

    • You purchased a used vehicle over three years old. Cars depreciate more during the first few years, so some insurers may not offer gap coverage for older models.
    • Your loan is for three years or less. If you make a sizeable down payment and have a short-term loan, it’s less likely that your loan will turn upside down.
    • You can afford the difference between the amount owed and the car’s value. If you can afford to cover the gap if your vehicle is stolen or totaled, gap insurance may not be worth it.  

    What is an Upside Down Loan?

    A car loan is “upside down” when your remaining balance exceeds your vehicle’s worth. While being upside down isn’t necessarily a problem if you can continue to make payments and keep your car until the loan is paid off, it can become an issue if your car is totaled, stolen, or must be replaced quickly. Loans typically become upside down due to a lack of an initial down payment or when you opt for a longer term.

    Should I Purchase Gap Insurance from the Dealership?

    A couple purchasing a new car from the dealership

    You’ll typically have the option of purchasing gap insurance directly from the dealer when financing a new car. However, it isn’t recommended that you do so. For one, gap insurance purchased through a dealer may be included in your loan payments, making them subject to additional interest. Additionally, purchasing gap coverage through a standard insurer is often significantly cheaper.

    How Much Does Gap Coverage Cost?  

    As mentioned, gap coverage purchased with an insurer is typically cheaper than with a dealership. It is possible to purchase a stand-alone gap insurance policy. However, you’ll get a better deal by adding it to your current policy with comprehensive and collision coverage. Overall costs can vary depending on your vehicle, but according to the Insurance Information Institute, adding gap insurance with your collision and comprehensive coverage generally only adds about $20-$50 to your annual premium.  

    Looking to Compare Quotes? AIS Can Help 

    With so many different coverage types, navigating the insurance marketplace can sometimes feel tricky. However, it doesn’t have to be. At AIS, we have a team of insurance specialists who can assist you in your search for reliable car insurance. For over 55 years, we’ve helped our customers find and compare quotes from our network of insurance providers. To learn more about gap insurance or any other forms of coverage, give us a call today at (888) 772-4247, or start a free quote online.

    The information in this article is obtained from various sources and offered for educational purposes only. Furthermore, it should not replace the advice of a qualified professional. The definitions, terms, and coverage in a given policy may be different than those suggested here. No warranty or appropriateness for a specific purpose is expressed or implied.