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What Is Gap Insurance (Explained: All You Need To Know)

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What Is Gap Insurance 

A gap insurance coverage, also known as a loan/lease payoff coverage, is an optional insurance coverage you can take on your car allowing you to pay off your car loan should your car get totaled or in the event of theft if you owe more than the car’s depreciated value.

In other words, if you fully lose your car due to theft or accident, your insurance company will pay you the amount you need to cover the depreciated value of your car and what’s owed on your car loan.

For example, if your car is worth $15,000 and you still owe $20,000 on it, your gap insurance coverage will cover the difference between the amount you owe your creditor ($20,000) and the depreciated value of your car ($15,000).

For you to get this type of coverage, typically you’ll need to be the original loan holder or leaseholder on the vehicle.

What Does Gap Insurance Cover

In the event your car is stolen or badly damaged where the value of the repairs exceeds the market value of your car, a gap insurance will cover the difference between what you owe on your car loan or car lease and the market value of your car at the moment of the claim.

The main purpose for getting a gap insurance coverage is to help protect you from owing money to pay off your car loan or lease when your car is totaled or stolen.

If you buy or lease a brand new vehicle, it’s quite common to see the value of your car loan or lease exceed the market value of your car as soon as you drive your new car off the dealership’s car lot.

Your standard car insurance policy will cover replacement or the repair value of your vehicle up to its market value.

By combining your standard car insurance policy with a gap insurance coverage, you are essentially getting full financial protection in the event your car is fully lost in an accident or stolen. 

Should the insurance company decide not to repair your car and declare it totaled while you owe more on your car than what your car is worth, you’ll know that you will not have to spend a dime as your gap insurance option will cover it for you.

When Do You Need Gap Insurance

There are certain instances when gap insurance may be worth getting.

Here are some of the most common reasons why drivers consider taking the gap insurance option:

  • When a person is buying a car and putting a very low cash down payment (ending up with a high loan to car value ratio)
  • When a person finances the purchase of a vehicle over a very long amortization period (like 60 months or more)
  • When the type of car purchased is one that loses its market value fast
  • When negative equity is being rolled over into a new car loan
  • When a person is leasing a brand new car 

As you can see from these examples, gap insurance comes in handy when there is a likelihood that the value of a car loan exceeds the value of the car for a long period of time.

What Is A Gap Insurance Example

Let’s look at a common example where gap insurance may be relevant for the purchaser of a new vehicle.

Imagine that you are looking to buy an expensive car worth $60,000 and you do not intend to put any cash down payment and you’d like to have a long amortization period of seven years.

You are able to get a car loan financing at a rate of 10% (totaling $6,000 over 72 months to keep things simple).

You will need to make 72 car payments of $833.33 in principal and $83.33 in interest (a total of $916.66).

Typically, when you drive a new vehicle out of the dealership, it will lose 20% of its value.

In essence, a month after you bought your car, you’ve made one payment of $916.66 where you paid off $833.33 capital on your loan and you still owe $59,166.67.

However, your car is now worth $48,000.

If you run the risk of totaling your car or your car gets stolen, your standard car insurance will cover you up to $48,000 and you’ll need to pay $11,166.67 from your pocket.

To get further financial protection, you can get a “gap” insurance covering the “gap” between your car loan and the market value of your vehicle.

Frequently Asked Questions 

Let’s look at a few questions often asked related to gap insurance coverages.

What Is Gap Insurance For Cars

The fact is that gap insurance may be worth it for some but not for others, it’s a decision that is unique to a person.

If you are buying a very expensive car and you are stretching all your finances and dollars to get yourself a dream car and you can’t afford to spend a dollar more, then you may want to get gap insurance to cover the difference in the market value of your car (at the moment of a claim) and what you owe on your car.

On the other hand, if the gap insurance premiums are not something that you’re interested in paying and you don’t mind having a car loan valued more than your car for some time, then you may choose not to take this insurance option.

Is Gap Insurance Worth Buying?

Gap insurance is worth buying if you do not want to run the risk of having to owe money to your car lender should your car be stolen or get totaled.

For example, if you owe $30,000 to your lender for your car and you get into an accident totaling your car worth $23,000 at the moment of the claim, your standard car insurance will pay you up to $23,000 (the difference between $23,000 and what you owe on your car will come out of your pocket).

However, if you took a gap insurance coverage to complement your standard car insurance policy coverage, your insurance company will pay the remaining $7,000 so you don’t have to pay anything personally out of your pocket.

Who Needs Gap Insurance?

The fact is that not everyone will need gap insurance or get much value from it.

However, others will.

Here are some of the people that may see real value in purchasing automobile gap insurance:

  • Car owner buying a new car without any cash down payment
  • Car owner making a small cash down payment on a car 
  • Lessee leasing a car 
  • Expensive sports car owners 
  • Car owners who finance their car including other products 
  • Car owners that purchase a vehicle with a high mileage 

Do You Get Money Back From Gap Insurance?

Typically, your insurance company will pay off the extra value of your loan by directly reimbursing your auto lender.

For instance, if your car is totaled and your standard policy covers the market value of your car worth $20,000 but you still need another $5,000 to pay off your car loan, your gap insurance payout of $5,000 will be made directly to your car lender.

As a result, you will not get any money back from your gap insurance.

Do You Have To Buy Gap Insurance From A Dealer?

Although most car owners tend to buy gap insurance directly from their car dealerships, you can also find gap insurance after you buy the car as well.

You’ll need to shop around to find insurance companies offering this type of coverage to complement your standard auto insurance.

However, keep in mind that some insurance companies will only provide gap insurance coverage only when certain requirements are met such as:

  • You are the original owner of the car 
  • Your car is relatively new and not older than a certain number of years

Where Can You Get Gap Insurance?

Quite often, gap insurance is offered on a new vehicle directly at your dealership.

You can also get yourself gap insurance coverage from various insurance carriers.

It’s important to keep in mind that auto gap insurance is offered on new vehicles and so you’ll need to ensure you respect the qualification requirements of the insurance carriers.

In essence, you can find gap insurance through:

  • Car dealerships
  • Car loan lenders
  • Banks
  • Credit unions 
  • Insurance companies 

How Long Does Gap Insurance Last?

Gap insurance will typically apply throughout the entire duration of your policy.

However, the value of your gap insurance will not last as long.

You truly benefit from gap insurance coverage for so long as the value of your car loan exceeds the market value of your car.

If your car is worth more than the debt you owe to your lender, you are perfectly covered with your standard car insurance policy giving you coverage up to the market value of your car (thus fully covering the value of your car loan).

How Much Does Gap Insurance Cost?

So, how much is gap insurance?

Although it’s not possible to give you a specific answer in how much gap insurance may cost as there are many variables that insurance companies will consider, according to the Insurance Information Institute, you can expect to pay as low as $20 a year to your annual premium for your gap insurance protection if you purchase it from auto insurance companies.

On the other hand, if you purchase gap insurance from your dealer, you can expect to pay between $500 and $700.

What Factors Affect The Cost of Gap Insurance?

Although every underwriter will consider various factors to establish the premium for gap insurance, you can expect the following factors to impact how much you’ll be asked to pay:

  • Your car’s actual cash value (ACV)
  • The location where you live
  • The age of your vehicle 
  • Your car insurance claim history 

What Does Gap Insurance Cover On A Car?

It’s important to know what gap insurance covers and what it does not.

In general, gap insurance covers:

  • Theft 
  • Accidents
  • Vandalism 
  • Fire
  • Acts of nature like tornado, hurricane, flood, earthquake etc
  • Negative equity from a prior car loan 

On the other hand, gap insurance will not cover:

  • Insurance deductibles
  • Failure of your car engine
  • Mechanical failure on your car
  • Your car’s extended warranties
  • Death 

Do I Need Gap Insurance If I Have Full Coverage?

If you have full coverage or comprehensive insurance for your automobile, it means that you are protected against collisions but also expected events such as the destruction of your car, vandalism, flood, or other events leading to the loss of your car.

However, full coverage provides you coverage up to the market value of your car at the moment the claim is made.

In essence, you get the actual cash value for your car not how much the car was worth when it was new or how much you owe on your car loan if that value exceeds the actual cash value.

With gap insurance, you can complement your full coverage to provide you coverage for the amount that you may owe on your car over and above your car’s actual cash value.

What Does Gap Insurance Mean Takeaways 

So there you have it folks!

What is gap insurance and what does it cover?

How does gap insurance work?

Gap insurance, or guaranteed auto insurance, is a type of insurance coverage that you can add to complement your standard collision insurance or comprehensive insurance covering the difference between the value of your car loan and market value of your car or truck if your car is totally lost or stolen.

In essence, in the event of theft or your car is considered totaled, your standard collision insurance will pay for the market value of your car and your gap insurance will pay the difference between the market value and your car loan if you owe more on your car.

There’s no obligation for you to purchase gap insurance.

However, those who do not want to put money down to purchase a car, have a tight budget, purchase a car that depreciates in value quickly, or have a negative car loan rollover, then it may make sense to get the added protection.

I hope I was able to give you a quick and simple explanation of what is gap insurance coverage, what insurance companies offer gap insurance, what gap insurance covers, and how it works.

Let’s look at a summary of our findings on what is gap insurance on a car.

Summary of What Is Gap Insurance

  • Gap insurance is a type of insurance option that protects you from the depreciation of your car resulting in your car being worth less than the value of your car loan
  • Your standard car collision insurance protects you up to the market value of your car
  • Your gap insurance protects you from the market value of your car up to the value of your car loan if the car loan exceeds the market value of your car 
  • Through a gap insurance coverage, your insurance company will pay the difference between the amount paid for a total loss and the value of a car loan when the loan exceeds the total loss payment 
Actual cash value 
Actual total loss 
Auto insurance discuonters 
Car insurance policy 
Car insurance quote 
Collision coverage
Comprehensive coverage 
Gap addendum
Gap contract 
Gap insurance companies 
GAP waiver 
Insurance dealer 
Insurance deductibles 
Liability insurance 
Loan rollover 
Modified car insurance 
New car replacement coverage 
Qualifying claim 
Truck insurance policy 
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Car repair insurance 
Co-insurance 
Copayment
Full coverage car insurance 
How to get Affordable Health Insurance
Mechanical breakdown insurance 
Rental car insurance 
Truth in Lending Act 
Types of car insurance 
What is collision insurance 
What is comprehensive insurance 
What is credit life insurance 
What is Edmunds 
What is Kelley Blue Book
When is a car considered totaled
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