What is gap insurance?
Gap insurance is a type of insurance coverage that helps protect you financially if you experience a total loss of your vehicle, and the amount you owe on the vehicle is greater than the amount it is worth at the time of the loss.
For example, let’s say you purchase a car for $30,000 and take out a loan to pay for it. A year later, you get into an accident, and your insurance company declares your car a total loss. However, at the time of the loss, your car is only worth $25,000, but you still owe $28,000 on your loan. This means you have a “gap” of $3,000 between what your car is worth and what you owe.
If you have insurance, the policy will pay out the difference between the actual cash value of your car at the time of the loss and the amount you still owe on your loan or lease. This can help you avoid having to pay the remaining balance out of pocket.
Gap insurance is typically offered as an add-on to your regular auto insurance policy, and it can be particularly beneficial if you have a high-interest car loan or lease, or if you’re purchasing a vehicle that tends to depreciate quickly.
Types of gap insurance
There are several types of gap insurance that you can choose from, including:
- Loan/lease gap insurance: This is the most common type of insurance, and it covers the difference between the amount you owe on your auto loan or lease and the actual cash value of your vehicle.
- New car replacement gap insurance: This type of insurance is designed specifically for new vehicles, and it covers the difference between the actual cash value of your car and the cost to replace it with a brand-new one.
- Deductible gap payout: If you have a high deductible on your auto insurance policy, deductible insurance can help cover the amount of your deductible in the event of a total loss.
- Equity gap insurance: This type of insurance is designed for people who have paid off a significant portion of their auto loan, but still owe more than the actual cash value of their vehicle.
- Refinancing gap payout: If you refinance your auto loan and the new loan amount is greater than the actual cash value of your vehicle, refinancing insurance can help cover the difference.
It’s important to note that not all types of gap payout are available in all states, and some types may not be offered by all insurance companies. Be sure to talk to your insurance agent to determine which type of gap payout is right for you.
How does gap insurance work?
Gap insurance works by covering the “gap” or difference between what you owe on your vehicle and its actual cash value at the time of a total loss. Here’s how it typically works:
- You purchase a vehicle and finance it with a loan or lease.
- You add insurance to your auto insurance policy. This may be an additional cost, but it’s typically relatively affordable.
- If your vehicle is declared a total loss due to an accident, theft, or another covered event, your insurance company will determine the actual cash value of your vehicle at the time of the loss.
- If the actual cash value of your vehicle is less than the amount you owe on your loan or lease, your insurance policy will kick in to cover the difference.
For example, let’s say you have a car that’s worth $25,000, but you owe $30,000 on your auto loan. If your car is declared a total loss, your insurance company may only pay out $20,000 (the actual cash value of the vehicle). However, because you have gap payout, your policy will cover the remaining $5,000 that you still owe on your loan.
It’s important to note that gap payment typically only covers the gap between what you owe and the actual cash value of your vehicle. It won’t cover any additional expenses you may incur, such as towing or rental car costs. Additionally, gap payout only applies in the event of a total loss. If your car is damaged but repairable, gap payment won’t apply.
What does gap insurance cover?
Gap payment covers the difference between the actual cash value (ACV) of your car and the amount you owe on your car loan or lease. This includes:
- The remaining balance of your car loan
- The cost of any unpaid fees or charges associated with your car loan or lease
- The cost of any aftermarket accessories or modifications you made to your car
What does gap insurance not cover?
Gap payment does not cover everything. Here are some things that are not covered by gap insurance:
- The amount of your car loan or lease that exceeds the policy limit of your gap payment
- Deductibles on your car insurance policy
- Mechanical repairs or maintenance
- Personal belongings that were inside the car at the time of the accident or theft
- Any car loan or lease payments that you missed before the accident or theft occurred
Is Gap Insurance Worth It?
Factors to consider when deciding whether or not to purchase gap payout
Whether or not you should purchase gap payment depends on several factors, including:
- The amount of your down payment: The more you put down on your car, the less you will owe on your car loan or lease, which means you may not need gap payment.
- The length of your loan or lease: The longer your loan or lease term, the more likely it is that you will owe more on your car than it is worth, which means you may need gap insurance.
- Your car’s depreciation rate: Some cars depreciate faster than others, which means they lose their value more quickly. If you have a car that is known for depreciating quickly, you may want to consider purchasing gap insurance.
- Your car insurance policy: Some car insurance policies already include gap coverage, so you may not need to purchase separate gap payout.
How much does gap payment cost?
The cost of gap payout varies depending on several factors, including:
- The type of car you have: The more expensive your car is, the more expensive the gap payment will be.
- The length of your loan or lease: The longer your loan or lease term, the more expensive gap payment will be.
- Your credit score: If you have a low credit score, you may be charged a higher premium for gap insurance.
- Where you purchase gap insurance: Gap payment purchased through your auto loan or lease provider is typically more expensive than gap payout purchased through an insurance company.
On average, gap payment costs between $300 and $700 for a two- to three-year policy. However, the cost can vary significantly depending on the factors mentioned above.
Where can you purchase gap insurance?
There are several places where you can purchase gap insurance, including:
- Your auto loan or lease provider: Many auto loan and lease providers offer gap payout as an add-on to your loan or lease agreement.
- Your car insurance provider: Some car insurance companies offer gap coverage as part of their car insurance policies.
- Independent insurance companies: You can also purchase gap payout through independent insurance companies.
Tips for Buying Gap Insurance
- Read the fine print: When purchasing gap payout, it’s important to read the fine print and understand what is and is not covered by the policy. Pay attention to the policy limit, which is the maximum amount that the insurance company will pay out in the event of a claim.
- Shop around for the best rates: Just like with car insurance, it’s a good idea to shop around for the best rates on gap payout. Compare quotes from multiple providers to find the best deal.
- Consider the length of your loan or lease: If you have a shorter loan or lease term, you may not need as much gap coverage as someone with a longer loan or lease term. Consider the length of your loan or lease when deciding how much coverage to purchase.
- Check with your car insurance provider: If you already have car insurance, check with your provider to see if gap coverage is included in your policy. If it is, you may not need to purchase separate gap payout.
- Understand your car’s depreciation rate: As mentioned earlier, some cars depreciate faster than others. Research your car’s depreciation rate to determine whether or not you need gap payout.
Gap insurance can provide valuable protection for car owners who are at risk of owing more on their car loan or lease than their car is worth. However, whether or not gap payout is worth purchasing depends on several factors, including the amount of your down payment, the length of your loan or lease, your car’s depreciation rate, and your car insurance policy. When deciding whether or not to purchase gap payout, it’s important to consider these factors and read the fine print of any policy you are considering. Additionally, it’s a good idea to shop around for the best rates and to check with your car insurance provider to see if gap coverage is already included in your policy. By taking these steps, you can make an informed decision about whether or not gap payout is right for you.