Gap Insurance Coverage: Is it Worth Buying?

Guaranteed asset protection is usually called gap insurance. Gap coverage is also known as total loss replacement coverage. Different insurers have different names for gap insurance, but they are all the same.

People who owe more on their vehicle than their car is worth need gap insurance.

People who owe more on their vehicle than their car is worth need gap insurance. Gap insurance covers the remaining balance after you have been paid out the car's actual cash value after a total loss.

Often people with collision coverage don't understand why they have to reach into their own pockets to pay for an accident. Chances are they had an upside down loan, owing more than the car's value. Car insurers offer gap insurance to help pay for that gap between the value of the car and what you still owe to a lender.

Here are some important things to keep in mind if your car's value depreciated or you bought a car that is valued lower today than what you owe to lease or finance it.

When Should I Buy Gap Insurance?

You can only buy gap insurance on new cars. In fact, when you lease or finance a car at the dealership, they will try to include gap insurance in your monthly payments. Don't buy from the dealership, which offers the most expensive gap insurance option.

Don't buy from the dealership, which offers the most expensive gap insurance option.

It's important to do some number crunching before you buy an insurance policy. Begin with what you owe and consider your loan amount. Check the Kelley Blue Book Value against what you owe and see which one is greater. If your car loan is greater than the car's value, you will want to consider gap coverage.

According to the Insurance Information Institute, it may be a good idea to consider buying gap insurance for your new car or truck purchase if you:

  • Made less than a 20 percent down payment

  • Financed for 60 months or longer

  • Leased the vehicle (carrying gap insurance is generally required for a lease)

  • Purchased a vehicle that depreciates faster than the average

  • Rolled over negative equity from an old car loan into the new loan.

In these instances, gap insurance could be financial protection against costly consequences if the vehicle were to be declared a total loss.

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What if I Have Collision Coverage?

A collision insurance policy would pay the majority of the loss and the gap insurance policy would pay the remainder on the loan or lease.

A collision insurance policy would pay the majority of a total loss and the gap insurance policy would pay the remainder on the loan or lease.

In a lease or financing agreement, drivers are required to carry collision and comprehensive insurance. However, these coverages will still leave you with an outstanding balance if your car is totaled and you owe more than its cash value.

Consider Gap Insurance When Shopping for a Car

Well before buying auto insurance, the best thing you can do is to be careful when car shopping. Often, the sticker price on the car you want will exceed its actual cash value but the car dealer won't tell you that. Be conscious of how competitively the car you want is priced. Look online for the Kelley Blue Book Value and you'll see what others are paying for the same make and model before you buy a car.

If the car you want to buy is more expensive than the cars you see while researching, ask why the sticker price is so high and try to haggle it down. Some people make emotional purchasing decisions, even after finding out that they are paying more than the actual cash value of the car. The car may be just the right color, or it has certain options that make it the perfect car for you.

If you buy a car worth less than it's Kelley Blue Book Value, the most important thing you must do is protect this expensive asset by insuring it responsibly: purchase gap insurance so you're insured for what you owe, not the actual cash value of the car.

Depreciation and Gap Insurance: Will Gap Insurance Cover the Balance?

It's also important to keep in mind that your car depreciates the moment you drive it off the dealership lot. Do not think that your car is worth what you paid for it 5 minutes prior. New cars depreciate by the thousands immediately after purchase. Depreciation means that the car drops in value, but depreciation does not change how much money you owe on the car.

You'll want to sit down with your agent and really dig into the numbers to see what's most cost effective for you without leaving any gaps in coverage. If you do have an upside-down loan (the car is worth less than you owe), don't buy gap coverage from a car dealership. You will pay much more from the same coverage you can buy from your current insurer or a new insurance company that may offer you lower rates overall.

If you're interested in finding out what rates are available to you, and you haven't compared car insurance quotes in the past year, you're probably paying too much. To get started on free car insurance quotes, just enter your zip code on this page and answer some simple questions needed to bring you an accurate quote.

How Does Gap Insurance Work?

Gap insurance works by covering the gap between what you owe and what your insurance company is willing to pay out according to your car's actual cash value (ACV). After paying your deductible for collision or comprehensive, the auto insurance company would pay for the comprehensive and collision coverage, which will pay for the majority of the loss. Gap insurance would pay what's left of the balance on your car loan or lease.

Review your auto insurance policy against your car loan to see if carrying gap insurance makes sense for you. If you have new car replacement coverage, you may not need gap coverage. However, if the claim payout is to replace your car with the same make and model at market value you may still owe more than the value of the car in the current market.

Is Gap Insurance Worth the Cost?

Unless you buy gap insurance from a car dealership, gap insurance cost is minimal. Dealers offer the most expensive gap insurance products, which aren't necessarily better. Make sure they do not lump gap insurance into your payments and call your insurer to add it on if you decide it'll benefit you.

An auto insurer will add gap insurance at a minimal cost after discussing your auto loan. Having negative equity is much more costly than a monthly gap insurance payment so make wise decisions. If you want to save money, you can comparison shop car insurance quotes for your new car by calling: 855.214.2291. We're here to help, and our service is free.

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