What Does Gap Insurance Cover? Cost and Availability, Exclusions and Limitations, Duration of Coverage & More
Gap insurance is an optional coverage that helps pay off your auto loan if your car is totaled or stolen and you owe more than its depreciated value.
When you buy or lease a new car, its value immediately decreases, and if you have a covered claim, your collision or comprehensive coverage would pay for your totaled or stolen vehicle up to its depreciated value.
Gap insurance covers the difference between the compensation you receive after a total loss of your vehicle and the amount you still owe on a car loan.
It may be worth considering if you made little or no down payment when financing your car, have a car loan longer than five years, or if your car depreciates quickly.
The cost of gap insurance depends on your state, driving record, and vehicle, and it’s typically available from car insurers or dealers.
It’s important to note that gap insurance is optional and may only be available if you’re leasing or financing a new vehicle.
Coverage for vehicle depreciation
Gap insurance covers the “gap” between the actual cash value of a vehicle and the amount still owed on the car loan.
It is designed to protect individuals who finance or lease their vehicles.
If a car is stolen or totaled, gap insurance covers the difference between the car’s actual value and the outstanding lease or loan balance.
This coverage is particularly relevant for those who finance a new car for 60 months or longer, lease a vehicle, make a down payment of less than 20%, or have a loan where the amount owed exceeds the car’s value.
The cost of gap insurance varies by state, driving record, and vehicle, and it can be purchased as an endorsement on a car insurance policy or separately from a dealer or insurer.
Total loss situations
Gap insurance becomes crucial in scenarios where the actual cash value of a vehicle is less than the amount owed on the car loan, especially in cases of total loss due to accidents or theft.
When a car is totaled or stolen, standard insurance policies cover the depreciated value of the vehicle, which may be less than the outstanding loan or lease balance.
Gap insurance covers the difference, protecting individuals who finance or lease their vehicles.
This coverage is particularly relevant for those who make little or no down payment, finance a new car for 60 months or longer, lease a vehicle, or purchase a vehicle that depreciates faster than average.
In these instances, gap insurance could protect against potentially negative financial consequences if the vehicle is declared a total loss.
The cost of gap insurance varies by state, driving record, and vehicle, and it can be added to an auto insurance policy for as little as $20 a year.
Loan and lease coverage
Gap insurance is applicable for both auto loans and leases, offering protection to different types of vehicle financing.
It is designed to cover the “gap” between the actual cash value of a vehicle and the amount still owed on the car loan or lease.
This coverage is particularly relevant for those who make little or no down payment, finance a new car for 60 months or longer, lease a vehicle or purchase a vehicle that depreciates faster than average.
In these instances, gap insurance could protect against potentially negative financial consequences if the vehicle is declared a total loss due to accidents or theft.
The cost of gap insurance varies by state, driving record, and vehicle, and it can be added to an auto insurance policy for as little as $20 a year.
Gap insurance can be purchased from the dealership at the time of sale, from an auto insurance company or from banks and credit unions.
Exclusions and limitations
Gap insurance typically doesn’t cover overdue payments, extended warranties, or non-factory accessories.
It is designed to cover the “gap” between the actual cash value of a vehicle and the amount still owed on the car loan or lease.
However, it does not typically cover overdue payments, late fees, financial penalties, or the portion of the loan or lease balance resulting from extended warranties, credit life insurance or non-factory accessories added to the vehicle.
It’s important to review the terms and conditions of the gap insurance policy to understand what is and isn’t covered.
When it’s most beneficial
Having gap insurance is highly beneficial in several scenarios, especially for new cars that rapidly depreciate in the first few years.
When you buy or lease a new car, its value starts to depreciate the moment it leaves the car lot.
If you finance the purchase with a small deposit, the amount of the loan may exceed the market value of the vehicle in the early years of ownership.
In the event of an accident where the car is badly damaged or totaled, gap insurance covers the difference between the vehicle’s current value (paid by standard insurance) and the amount owed on it.
Gap insurance is particularly beneficial if you made little or no down payment, financed the car for 60 months or longer, leased the vehicle, or purchased a car that depreciates faster than average.
It can protect against negative financial consequences if the vehicle is declared a total loss due to accidents or theft.
Steps to obtain Gap insurance
When considering purchasing gap insurance, there are several steps and considerations to keep in mind.
Gap insurance can be obtained in two main ways: from your auto insurer as part of your regular insurance policy, or through the dealership or lender, rolled into your loan payments.
It’s generally recommended to buy gap coverage through your auto insurer to avoid paying interest on it.
Not all car insurance companies provide gap coverage, so you may need to switch companies if you decide to purchase this type of insurance.
The cost of gap insurance varies, with auto insurers typically charging a few dollars a month or around $20 a year.
If you purchase gap insurance from the dealership, the cost is typically a flat rate of $400 to $700.
It’s important to note that gap insurance may be required by the terms of your lease or loan agreement, especially if you made little or no down payment, financed the car for 60 months or longer, leased the vehicle, or purchased a car that depreciates faster than average.
Cost and availability
Gap insurance can be purchased through auto insurers, dealerships, or specialized providers.
When buying gap insurance, it’s important to consider the cost, which varies depending on where it’s purchased.
Auto insurers typically charge a few dollars a month or around $20 a year for gap insurance, while dealerships may charge a flat rate ranging from $400 to $700.
It’s generally recommended to buy gap coverage through your auto insurer to avoid paying interest on it.
Not all car insurance companies provide gap coverage, so you may need to switch companies if you decide to purchase this type of insurance.
Factors such as your vehicle’s actual cash value, insurance claims history, age, and location can impact the cost of gap insurance.
It’s essential to discuss these details with your auto insurance provider to understand the cost of gap coverage and determine if it’s the right coverage for your needs.
Duration of coverage
Gap insurance is typically effective for the duration of the auto loan or lease.
It’s often more critical in the early years of vehicle ownership when the car’s value depreciates rapidly.
When you finance a new car and put down only a small deposit, the amount of the loan may exceed the market value of the vehicle in the early years of ownership.
If the car is declared a total loss due to accidents or theft, gap insurance covers the difference between the vehicle’s current value (paid by standard insurance) and the amount owed on it.
Gap insurance is particularly beneficial if you made little or no down payment, financed the car for 60 months or longer, leased the vehicle, or purchased a car that depreciates faster than average.
The cost of gap insurance varies depending on where it’s purchased, with auto insurers typically charging a few dollars a month or around $20 a year, while dealerships may charge a flat rate ranging from $400 to $700.
Alternatives and considerations
When considering alternatives to gap insurance, one option is to make a larger down payment when financing a vehicle.
This reduces the loan amount and the potential “gap” between the car’s value and the loan balance.
Another alternative is to choose a shorter loan term, which can help prevent the loan balance from exceeding the vehicle’s value.
Additionally, some auto insurers offer “loan/lease payoff insurance,” which works similarly to gap insurance.
This coverage pays the difference between the car’s value and the remaining loan or lease balance in the event of a total loss.
However, not all insurers offer this coverage, so it’s important to check with your insurance provider.
While these alternatives can help mitigate the need for gap insurance, they may not fully protect against the financial risk of a total loss, especially for new cars that rapidly depreciate.
It’s essential to carefully evaluate the pros and cons of each option based on individual financial circumstances and the specific terms of the auto loan or lease agreement.
Conclusion
When deciding whether to invest in gap insurance, it’s crucial to assess individual needs and circumstances.
Gap insurance may be beneficial for those who made little or no down payment, financed a car for 60 months or longer, leased the vehicle, or purchased a car that depreciates faster than average.
However, alternatives such as making a larger down payment or choosing a shorter loan term can also mitigate the need for gap insurance.
It’s important to carefully evaluate individual financial circumstances and the specific terms of the auto loan or lease agreement to determine the best option.
Factors such as the vehicle’s actual cash value, insurance claims history, age and location can impact the cost of gap insurance.
Therefore, it’s essential to discuss these details with an auto insurance provider to understand the cost of gap coverage and whether it aligns with individual needs.