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Gap Insurance Coverage: Is It Worth Buying?

Guaranteed asset protection (gap) insurance is add-on auto coverage that protects you from out-of-pocket costs if your new car is totaled in a car accident. Gap insurance pays for that “gap” between what is owed on the car loan and its actual cash value so you don’t have to reach into your wallet.

Auto insurers typically cover your totaled vehicle at its actual cash value, which accounts for depreciation. If the outstanding balance exceeds the vehicle’s actual cash value and you don’t have gap coverage, you are responsible for repaying the difference.

If you don’t purchase gap insurance at the time you buy the car, you can only buy it for about 30 days after the purchase.Here’s everything else you need to know about Gap coverage.

What Is Gap Insurance?

Gap insurance is an auto policy endorsement that covers the difference between what your auto policy covers and the outstanding balance on your auto loan if your car is totaled in a covered accident.

Your auto policy only covers your vehicle’s actual cash value (ACV), which accounts for the vehicle’s value depreciation. In many cases, your car’s ACV lowers at a faster rate than the balance on your auto loan. Gap insurance protects you so you’re not stuck with auto loan payments on a totaled vehicle you can’t even drive.

guaranteed asset protection (gap) insurance and actual cash value payment illustration

Why Do You Need Gap Insurance?

Gap insurance is a good idea if you are financing or leasing your car. Some lenders may offer and even require gap coverage as a one-time upfront fee or you may purchase it from your car insurer and add it to your policy.

If your car is totaled and your auto insurer covers only the vehicle’s actual cash value, gap coverage will cover the remaining lease payments.

There is no need to buy gap insurance if you fully own the car and there is no car loan (the car is fully paid off).

How Does Gap Insurance Work?

Insurers only pay up to your vehicle’s actual cash value if it is totaled and will not cover the remaining payments on your auto loan. Gap insurance covers the difference between what is owed on your auto loan and your vehicle’s actual cash value if it is totaled in a covered claim. 

Similar to a vehicle’s fair market value, ACV considers the vehicle’s age, mileage, accident history and other depreciation factors. According to United Policyholders, a car depreciates 11% the same day you drive your car home and then 20% for each year after that. Unfortunately, this can quickly lead to the remaining balance on your loan to be higher than your vehicle’s ACV.

If the outstanding balance exceeds the vehicle’s actual cash value and you don’t have gap coverage, you are responsible for repaying the difference.

This is where gap insurance comes in. If your vehicle is totaled and your loan balance exceeds its ACV, then gap insurance will cover the difference. Consider these two examples.

Example One

Say you finance a new car for $27,000. After two years, it is now worth $16,200 but you still owe $19,000 on the car loan. Your car gets totaled in a collision with another car and your collision coverage covers your losses up to $16,200. Your gap coverage pays for the remaining $2,800, minus your deductible.

guaranteed asset protection (gap) insurance calculation

Example Two

Jane financed a new car for $35,000. Three years later, Jane has an outstanding balance of $26,000 but the cash is only worth $21,000. Her car is stolen and Jane files a comprehensive claim with her auto insurance company.

Her claim is approved for $21,000 — the vehicle’s actual cash value. Fortunately, Jane has gap coverage and it pays for the remaining $5,000, minus her deductible.

Gap Insurance Requires Full Coverage

To buy gap insurance from your insurer, you will need comprehensive and collision coverage on your auto insurance policy. Also called full coverage, your lender will typically require you to carry these protections until you repay the loan.

Full coverage will pay for your totaled or stolen vehicle at its actual cash value, up to the policy limits. Gap coverage will pay for the difference between your car after depreciation and the outstanding loan balance.

What Does Gap Insurance Cover?

Gap insurance will cover your totaled vehicle in claims covered under your collision and comprehensive coverage. Examples of covered accidents include:

  • Theft (your car is stolen and cannot be recovered)
  • Fire
  • Falling objects
  • Natural disasters (e.g., hurricanes, tornados)
  • Damage by animals
  • Riots
  • Collision with another vehicle
  • Collision with an object, such as a tree or lamppost
  • Single-car rollover accidents

Not Covered Under Gap Insurance

Gap insurance will not cover you for the following expenses:

  • Missed or late payment fees
  • Extended warranty costs
  • Deductibles
  • Mechanical failures
  • Death
  • Medical expenses
  • Lost wages
  • Funeral expenses
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Is Gap Insurance Worth It?

If you’re financing or leasing your car, then buying gap insurance your lender or leasing company may require it. If you’re in a scenario where your lender does not require it, however, then picking up gap coverage may be worth it in the following scenarios according to the Insurance Information Institute (III):

  • You put down less than 20% on a new car.
  • The auto loan term is longer than 60 months (five years).
  • You traded in a vehicle you haven’t paid off for a new car and rolled the remaining balance into your new auto loan.
  • You’re a high mileage driver (high mileage contributes to a lower value).
  • You purchased a car that depreciates quickly (see table below).
Your auto policy only covers your vehicle’s actual cash value (ACV), which accounts for the vehicle’s value depreciation.

If you’ve made a large down payment (20% or more) or took out a short-term auto loan, then gap coverage may prove less useful. Short-term loans typically carry higher monthly payments which will help you keep better pace with your vehicle’s depreciation rate than a long-term loan.

Cars That Depreciate the Fastest

Since gap coverage is closely related to depreciation, cars that depreciate quickly can benefit from gap insurance. iSeeCars.com analyzed 8.2 million cars and found that the cars with the worst depreciation may retain only 35% to 43% of their value just after five years. For example, a car that cost $35,000 may only be worth $12,250 after the five-year mark.

The cars below depreciate 1.4 to 1.6 times more than the average vehicle.

Make and Model

Average 5-Year Depreciation

Avg. $ Difference from Manufacturer's Suggested Retail Price

Nissan LEAF

65.1%

$23,666

BMW i3

63.1%

$32,663

BMW 7 Series

61.5%

$63,271

Maserati Ghibli

61.3%

$51,659

BMW X5

60.3%

$41,950

Jaguar XF

59.5%

$38,523

BMW 5 Series

59.1%

$36,210

Audi A6

58.2%

$35,393

Lincoln Navigator L

57.7%

$44,849

Volvo S60

57.3%

$24,956

Source: iSeeCars.com

When It’s Time To Drop Gap Coverage

You should drop gap coverage once your auto loan balance is less than what your vehicle is worth. Once you reach this point, there is no financial loss related to depreciation that gap coverage will protect you from.

For example, if your vehicle is valued at $20,000 and you owe $19,000 on the car loan, then you would want to cancel gap insurance. Sites, like Edmunds and Kelley Blue Book, are good resources for researching your vehicle’s fair market values.

Ask your insurance company or lender about dropping gap coverage and getting a refund for canceling the coverage early — you may be entitled to a refund for the unused premiums.

How Much Does Gap Insurance Cost?

If you include gap insurance in your auto loan, it will typically be a one-time fee ranging from $400 to $700 depending on the lender and is paid upfront.

Adding gap coverage to your auto insurance policy will typically add $20 to your annual premium according to the III. This comes out to less than $2 per month, which can be more feasible than paying a large upfront fee through the lender.

Whether you buy gap insurance through your lender or auto insurance company, you may be entitled to a refund if you drop gap coverage mid-policy or repay your loan early. The refund is for the unused premiums, which will no longer provide you coverage because there is no longer a difference between the vehicle’s ACV and outstanding loan balance.

There is no need to buy gap insurance if you fully own the car and there is no car loan.

Can You Get Gap Insurance After Purchasing a Car?

If you don’t decide to purchase gap insurance at the time you buy the car, you can still buy gap coverage — typically 30 days after purchasing the car. Gap insurance is commonly bought in one of two ways:

  1. From your auto insurance company as an add-on to your auto policy
  2. From the dealership or lender as a flat fee on top of your loan balance

Keep in mind that some dealers will automatically add gap insurance to your auto loan, but you can ask them to remove the added coverage. You can probably buy gap coverage at a lower price from an insurance company versus the financer.

FAQs

Which insurance companies sell gap insurance?

Several national insurance companies sell gap insurance, including:

  • American Family
  • Auto-Owners
  • Liberty Mutual
  • Nationwide
  • Travelers
  • The Hartford
  • Erie
  • Amica

Is gap insurance the same as full coverage?

Gap insurance covers the difference between the vehicle’s actual cash value if totaled and the outstanding balance on the loan, while full coverage covers losses from certain types of accidents. Gap coverage applies on approved comprehensive and collision claims, such as fires, theft and collision with another vehicle or object (e.g., tree, fence, lamppost).

Do you get a refund for gap insurance?

If you drop gap insurance mid-policy or repay your loan early, then you may qualify for a refund for the unused premiums. Confirm this with your insurance agent before buying gap coverage, especially if you plan on making significant strides in your repayment plan during the policy period.

Key Takeaways

  1. Due to depreciation, the amount you owe on your auto loan may be higher than how much the vehicle is actually worth, and car insurance will only cover the vehicle’s worth, not the remaining loan payments.
  2. Gap insurance is an auto policy endorsement that pays for the remaining balance on your auto loan if your vehicle is totaled in a covered accident, such as a fire, theft, collision with another vehicle or an object (e.g., tree, fence, lamppost) or a single-car rollover.
  3. Gap insurance is sometimes required by lenders if you finance or lease your vehicle.
  4. Purchasing full coverage (collision and comprehensive) is required before you can purchase gap insurance from an auto insurance company.
  5. You can drop coverage once your outstanding loan balance falls below how much your car is worth.

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