Gap insurance, short for “guaranteed asset protection” insurance, is an add-on that will cover the difference in price between what you owe on a vehicle — and what it’s worth at the time of a total loss. If you’re wondering if gap insurance is worth it, the small cost of coverage may be a wise financial decision if you’re planning on buying a new car.
What does gap insurance cover?
Gap insurance pays for the difference in what you owe on a car and what your insurance company will pay you if the vehicle is declared a loss or stolen. Gap insurance only covers financed and leased vehicles, as long as you’re the borrower or the leaseholder.
How does gap insurance work?
When you buy a new car, it typically loses 10% of its value in the first month and an average of 20% in the first year. Imagine you have a new car loan for $30,000 and you’re involved in an accident a few months later that totals your car. Your insurance company will pay you the current market value of your vehicle, which could be $25,000 (or less) when you factor in the depreciation since you bought it.
The problem is, you still owe close to $30,000 on the loan. You’ll be stuck paying the difference of almost $5,000 out of pocket unless you have gap coverage. If you had the foresight to buy gap insurance, the carrier would step in to pay the difference between what you owe on the car loan and what your auto insurance company will pay you for your vehicle loss.
The company providing the gap coverage will typically pay off the car loan balance directly, so you don’t have to figure out how much your loan’s final outstanding balance is.
Do I Need GAP Insurance?
Gap insurance isn’t mandatory, but it works well when paired with comprehensive and collision coverage, which lenders will require you to have on a vehicle you’re paying off. If you’re leasing a vehicle, gap coverage may even be included in the lease payments.
Depending on the type of new car you purchase, the cost of gap insurance is small compared to the amount you could be responsible for if you have a major issue with your vehicle — and well worth it.
How much is gap insurance?
According to Tricor Insurance, buying gap insurance from a dealer or lender could cost between $400 and $900. And if you’re adding the amount to the loan, you’ll pay interest on the coverage fee.
Buying gap coverage from your insurance company is much less expensive. Tricor Insurance’s findings price gap coverage through an insurance carrier at $15 to $42 per year. And according to Progressive, gap coverage costs an average of $5 per month.
Is gap insurance worth getting?
GAP insurance is worth getting if:
- You put less than 20% down when you buy a car
- You owe more than the car is worth
- Coverage is not included on the leased vehicle
- You plan on financing it for at least four or five years
- You can’t afford to pay the difference in value out of pocket
Where to buy gap insurance
Car dealers and lenders typically sell gap insurance so you can rest assured you’re covered before you drive your new car off the lot. However, many car insurance companies also offer coverage, and it may be cheaper than the dealer’s pricing.
You don’t have to buy gap coverage at the dealer before driving the vehicle away, although it would be the safest bet. Most insurance companies allow you to buy gap coverage soon after. But the longer you wait, the more expensive the coverage may be, if it’s even available.
Alternatives to gap insurance
If you’d rather skip the additional coverage, there are alternatives to gap insurance. However, all the alternatives require a financial investment. You could:
- Pay for the car in full and skip financing.
- Pay at least 20% down, which is the average loss in value in the first year due to depreciation.
- Buy a used vehicle that’s less likely to depreciate as quickly.
- Buy a car insurance policy with new car replacement coverage, which will pay for the cost of a new car of the same make and model.
Adding new car replacement may be the cheapest option of the above. The optional coverage typically adds 5% to your car insurance premiums. [Avi- not sure if The Zebra is a competitor]
Do I need gap insurance if I have full coverage?
Full coverage does not pay above your vehicle’s actual cash value (ACV). If you owe more than your car’s ACV, only gap insurance will pay the difference.
How does gap insurance work if your car is totaled?
If the car you’ve financed is totaled or stolen and you have gap coverage, the gap insurer will pay the difference between the amount your auto carrier will reimburse you for the car and what you owe on the auto loan. This is crucial in the early period after buying a car when your loan may be more than what the car is worth.
Does gap insurance always pay out?
There are certain conditions when gap insurance doesn’t pay out. You must be the vehicle owner or leaseholder for gap coverage to pay. The vehicle must be declared totaled. In addition, gap insurance doesn’t pay for late car payments, which gets deducted from the final balance.