There are certain assets that lose their value almost immediately after purchasing them, and vehicles are one of them. As soon as you drive your car off the dealership lot, it starts losing value right away.
This may not be a big deal if you take good care of the car and plan to drive it for many years with no intention of selling or upgrading any time soon. But what happens if your car is ever stolen or totalled, and your outstanding car loan amount is more than what the car is worth?
In this case, your car insurance policy will only cover the current depreciated value of the car, and not your car loan amount. This can leave you paying extra to top up what’s remaining on your car loan.
Luckily, “gap insurance” is available which can help bridge the gap between your outstanding car loan and the depreciated value of your car.
Let’s get into a little more detail about gap insurance to help you determine if this type of policy is something you may want to consider taking out.
What Is Gap Insurance?
Gap insurance is an optional type of auto insurance that offers coverage for your auto loan or lease in the event that your vehicle is damaged beyond repair or stolen and you owe more than what the vehicle is currently valued at. In this situation, your policy would help pay off your car loan.
A typical auto insurance policy only provides coverage for the actual value of your vehicle, and not your auto loan amount. Gap insurance can help top off your coverage.
Not only does the name “gap” insurance serve as an acronym for “guaranteed asset protection” or “guaranteed auto protection,” but it also fills the “gap” between what you still owe on your loan or lease and what the depreciated value of the car is.
In order to qualify for this type of coverage, you must hold the original loan or be the original leaseholder of a new vehicle. Plus, you may need to purchase collision and comprehensive insurance to buy gap insurance. In addition, the vehicle may have to be brand new in some cases before you can buy gap insurance, depending on the insurer.
How Does Gap Insurance Work?
Gap insurance is designed to be used along with collision or comprehensive coverage, as mentioned above. If you file a claim that is approved, your collision or comprehensive policy would reimburse you for your stolen or totalled vehicle up to the amount of its depreciated value.
Gap insurance would then kick in to top up whatever you still owe on your loan or lease so there are no out-of-pocket expenses on your part.
For instance, let’s say you paid $30,000 for your car when you first bought it and its current depreciated value is $18,000. If you still owe $20,000 at the time that your car is either stolen or totalled, you would have to pay $2,000 out-of-pocket to settle the loan on your car. With gap insurance, your insurance provider would bridge that gap and cover you for the remaining $2,000.
It should be noted that the reimbursement provided by the insurer would go directly to the auto lender, and not you.
When Should You Get Gap Insurance?
Gap insurance is a great policy to have if you still owe a lot on your auto loan. There are certainly plenty of reasons why you may want to consider this type of policy, though it may not always make sense in many situations. Here are some scenarios when you want to get gap insurance, and when you may want to forgo it:
|When You should||When You Shouldn’t|
|– You leased a new car||– You bought the car outright without a loan|
|– You bought a new car||– You paid your auto loan to its current value|
|– You still have 60 months or more left of financing||– You can afford to get another vehicle|
|– The current value of the vehicle has not yet be repaid||– The vehicle has not depreciated very much|
|– You made a small (or no) down payment on the vehicle||– You made a down payment of at least 20%|
|– The vehicle is high value and depreciates quickly||– You have a backup vehicle in the meantime|
|– You have no other mode of transportation|
|– An old auto loan was rolled over into a new one|
Cost Of Gap Insurance
The cost of gap insurance varies in different situations. That said, the average tends to hover around 5% of your comprehensive or collision insurance premiums, which can translate into a few hundred dollars per year. You can add gap insurance to your current auto insurance policy and will only need it for a temporary amount of time as you repay your loan.
Where Can You Get Gap Insurance?
There are three places to get gap insurance:
- From your auto insurance provider.
- From a gap insurance company that will sell you a policy for a one-time fee.
- From the dealership or auto lender, whereby your premiums would be rolled into your car loan payments.
Things You Should Know Before Getting Gap Insurance
There are certain things you should watch out for prior to buying into a gap insurance policy, including the following:
- There are exclusions stipulated in the policy that could prevent you from being paid out. For instance, if it is discovered that the damage to your car is because you were driving recklessly or under the influence of alcohol or drugs, the insurer may not cover you.
- You need collision or comprehensive coverage already before you are able to top up your coverage with gap insurance.
- Car dealers may not be the best place to buy gap insurance from. The policy will likely be more expensive, and there may be a higher risk of being vulnerable to common car dealer scams. They may pocket your gap insurance payment without providing you with any coverage or may offer you coverage filled with exclusions.
Is There A Deductible Associated With Gap Insurance?
No, there is no deductible that must be paid with gap insurance.
How Long Does Gap Insurance Last?
Gap insurance is usually not as lengthy as a typical car insurance policy. Instead, gap insurance usually lasts around 2 years, after which your insurance provider may drop the policy. That said, coverage length varies, so you would need to speak with your insurance provider to get exact time frames.
When Should You Cancel Your Gap Insurance Policy?
You will want to cancel your gap insurance when you owe less on your auto loan or lease compared to the vehicle’s market value or when you’ve paid off your car loan.
If you still owe a lot on your car and the depreciated value is significantly lower than what you paid for it, you may want to consider taking out a gap insurance policy. While not required, this type of insurance can give you some peace of mind knowing that you’ll be covered if your car is ever totalled or has been stolen.
Be sure to weigh your options and assess your situation before taking out gap insurance, as this policy type is better suited for certain situations more than others.