Gap Insurance

What is Gap Insurance & when is it required?

Gap insurance is an auto insurance policy that car owners can buy to protect themselves from losses that may arise if the amount of compensation for a total loss is not sufficient to cover the amount that the insured owes on the vehicle’s financing or lease agreement.

It is an optional Car insurance. This coverage helps you pay off your auto loans if your vehicle is stolen or totaled and the car loan balance is higher than the vehicle’s depreciated value.

Sometimes, gap insurance is also known as “loan/lease coverage”. This coverage is only available to you if you are the original loan-holder or leaseholder for a new vehicle. Gap insurance covers the difference between the car’s depreciated value and the amount you owe.

How to Break it Down

John owns a car worth $12,000. Rock is an example of gap coverage at work. David still owes $17,000 in car payments. If John’s car is completely written off as a result of an accident or theft, John’s car insurance policy will reimburse him with $12,000. Rock owes $17,000 to the car financing company. However, he will still have $5,000 even though he doesn’t own a car.

John would purchase gap insurance if he needed it. The gap insurance policy would pay the $5,000 “gap,” which is the difference between what john received in reimbursement and the amount he owes on the car.

Situations that require Gap Insurance

 

  • You paid little to no down-payment when you financed a car. You’ll find yourself in a bad position with your auto loan if you don’t make a substantial down payment. It could take several years for the car’s real value to begin to balance out.
  • You have traded in an upside down car: If you trade in an upside down car, the dealer will add the amount you owe to your loan balance for the new vehicle unless you pay the difference upfront. If your car is stolen or totaled, this extra balance could be a problem.
  • You purchased a car that has a low resale price: You’d likely be in the red if you buy a car that loses its value quickly without making a significant down payment. Think 25% to 25% when we refer to substantial.
  • You want to get miles in a hurry: Driving a lot is the fastest way to reduce a car’s value. There will be a decrease in value as you drive more.
  • You have taken out a car loan for a longer term (more than 60 month):It takes longer to reach the break-even point with a long-term loan than normal. This is when the loan balance and car’s actual value start to equalize.

Many lenders will require that you have collision and comprehensive coverage on your auto insurance policy until you own the car.

This insurance can be a great way to increase your auto insurance coverage. However, before we get into the details of gap insurance, we need to understand what it is.

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The True Definition

Guaranteed Asset Protection insurance is also known as Gap insurance. This optional coverage can be added to help drivers bridge the gap between their car’s actual cash worth (ACV) and the amount they owe on it.

You are involved in an accident, but you are not found to be at fault. Your car is now totaled. Your auto loan balance is still $10,000 at the time of the accident. However, your ACV for the car is only $8,000. Gap insurance (minus your deductible) would cover the $2,000 difference.

Contrary to popular belief this coverage does NOT mean your insurance provider will pay you the entire amount you paid for your car. Gap insurance may allow your insurance provider to pay you the amount that you owe, less your deductible. Depending on your circumstances, this insurance can be a smart addition to your collision insurance policy.

Gap insurance: When should you consider it?

There are some things to consider when deciding if this coverage is necessary. For the following drivers, gap insurance can be a great option:

  • Drivers who owe more than the car’s value on their car loans.You should calculate your current car loan payment and compare it to the car’s cash value. This is not the same amount as the price you paid for your car. Do you have a gap? You should strongly consider buying this insurance if you have one.
  • Gap insurance is required for drivers whose car loan is outstanding.No matter how much you owe on your loan – some loan providers require gap coverage from the beginning of your loan.
  • Drivers with a lease that requires gap insurance. This coverage act as a protection measure that many auto leases include. Some leasing companies may include gap insurance as part of their lease price.

Drivers who own their car outright and drivers who owe less on their car than its current actual cash value (as there is not a “gap” in value) do not need gap insurance, but will still need car insurance coverage to help keep them and their car protected from the unexpected.

What is the cost of gap insurance?

You may be wondering how much gap insurance will cost to your auto insurance premium if you have to purchase it. This insurance is not as costly as comprehensive or liability insurance. However, costs can vary depending on many factors.

  • Current actual cash value (ACV), of your vehicle
  • Your age
  • Your state
  • Previous car insurance claims

You will not need gap insurance if you “close the gaps” and owe less on your car that its ACV.

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Is it worth buying?

Perhaps you are still asking yourself, “Is gap insurance worth it?” If the circumstances are right, it could be. This insurance covers your vehicle in the event it is totaled by theft or an accident that causes your car to be “total loss.” However, you are not the only driver who can take responsibility for your actions. If you have a car loan that is “upside-down”, you might not need this insurance. In this case, you could be reimbursed thousands more. Do you want to gamble with the gap?

WHEN DO YOU NEED IT?

If you are underwater on your auto loan (meaning you owe more money than your car is worth), then you may be eligible for gap insurance coverage.Totaled means”Repair costs are greater than the vehicle’s value” The state laws and the discretion of your insurer will determine whether a vehicle can be declared totaled.

CAN YOU GET GAP INSURANCE AFTER YOU BUY A CAR?

You might be eligible for gap insurance after buying a car. This depends on the year of the vehicle. This insurance is not sold only at car dealerships. Many insurers also offer gap insurance as part their car insurance policies. According to the III, gap coverage purchased from an insurance company is often less expensive than buying it at a car dealer.

In order to buy this insurance, some insurers may require that your vehicle be new. This could mean:

  • You are the original owner of your vehicle (you own the original lease or loan).
  • The vehicle must not be older than two to three model years

To purchase this insurance, check with your insurer.

IS IT VALUE-ADDED?

Gap insurance is not available to those who are leasing or financing new vehicles. Next, consider how much you owe on an auto loan compared to the car’s value. Is your car worth more than you owe it? If your car is totaled, could you afford to pay the difference?

The III suggests that you consider gap insurance for the following scenarios:

  • You must make a 20% down payment to your vehicle.
  • Your auto loan term is 60 months or more
  • If you are leasing a vehicle.

 If you are leasing a new vehicle- The Insurance Information Institute -III notes that most lease agreements include gap coverage. You can check your lease contract to confirm that you have coverage.

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Where can I buy gap insurance?

Some auto insurers, like Geico, do not offer gap insurance, while others vary in how this protection is offered and how it works. Let’s take a look at some of the options.

State Farm

State Farm is the largest U.S. auto insurer. However, they do not offer gap insurance. Instead, they have a Payoff Protector feature that anyone who gets a car loan from a State Farm (an alliance with US Bank), can access. Payoff Protector is only available for full coverage car insurance. However, this policy doesn’t necessarily need to be underwritten or approved by State Farm. You are eligible for the free Payoff Protector even if you have an auto insurance policy written by another insurance company.

Allstate

The Allstate gap program eliminates the difference between the primary auto insurance settlement amount and the balance remaining on a vehicle. It covers losses up to $50,000 and pays a deductible. Your deductible is the amount you are responsible for. It is subtracted from the loss insurance payout.

Progressive

Progressive limits coverage to 25% of the vehicle’s actual cash value. For as low as $5 per Month, you can get gap insurance coverage that is bundled with your existing policy.

Nationwide

Nationwide provides gap insurance, but it does not waive your deductible if you file for a claim. Be aware of your deductible and whether you are able to afford it in the event of total loss.

AAA

  AAA offers gap coverage for fully insured vehicles, which includes optional comprehensive and collision insurance. If your vehicle is declared totaled, the insurer will waive your deductible up to $1,000.

Esurance

Esurance (and other auto insurances) is gap insurance that includes auto loan and lease coverage. If you own full-coverage insurance and are financing a vehicle, or leasing it out, you may be eligible for coverage.

USAA

USAA auto insurance is available for active and retired military personnel and their families. This company provides Total Loss Protection to vehicles less than 7 years old with a loan greater than $5,000. It will reimburse up to $1,000 for a deductible.

If I have full coverage, do I still need gap insurance?

While you might feel like your auto insurance coverage is robust, auto insurers typically do not offer any one policy called “full coverage” that is designed to protect you against every possibility. Instead, you can get more protection by layering different types of coverage (e.g., liability, collision, comprehensive) together. Some drivers find adding gap insurance to their existing coverage to give them more peace of mind. Each driver’s coverage requirements and benefits may vary.

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