In this guide, we’ll dive into what gap insurance is, how it works, and why it might be an important coverage for car owners, especially those with outstanding car loans or leases. Understanding gap insurance coverage as part of your auto insurance can help protect your financial investment and prevent you from being stuck paying the remainder of your loan or lease on a vehicle that’s been totaled or stolen.
What is Gap Insurance?
Gap insurance, also known as Guaranteed Asset Protection (GAP), covers the difference between what you owe on your vehicle and its actual cash value (ACV) in the event of a total loss. This is particularly useful for new cars, which tend to depreciate quickly.
Standard car insurance will only pay out the market value at the time of the accident, which may be less than what you still owe on your loan or lease. The purpose of gap policy insurance is to bridge the gap between your car’s value and what you owe. You’d be on the hook for the remaining loan or lease payments without gap insurance coverage.
How Does Gap Insurance Work?
If your car is declared a total loss, your standard car insurance provider will calculate its current value based on factors like depreciation. If the payout from your policy is less than the remaining balance on your loan or lease, gap insurance kicks in to cover the remaining balance. Essentially, it protects you from owing money on a vehicle you can no longer drive.
Here are two ways to look at how gap insurance works:
- Scenario 1: Suppose you bought a car for $30,000 and financed it. After a year, your car is totaled in an accident, and your insurance company determines its ACV to be $20,000. If you still owe $25,000 on your loan, there’s a $5,000 gap between what the insurance pays and what you owe. Gap insurance for cars would cover that $5,000, preventing you from having to pay it out of pocket.
- Scenario 2: You’re leasing a vehicle, and unfortunately, it gets stolen. The leasing company may still require you to pay off the remaining lease payments. Gap insurance for leased vehicles helps cover these costs, so you don’t end up paying for wheels no longer in your possession.
Do I Need Gap Insurance?
Who Should Consider Gap Insurance?
If you’re financing or leasing a car, particularly if it depreciates quickly, gap insurance is something to consider. New cars lose value rapidly in the first few years, which increases the likelihood that your loan balance could be higher than the car’s market value. Additionally, if you made a smaller down payment or have a longer loan term, you’re at greater risk of needing gap insurance.
Do I Need Gap Insurance if I Have Full Coverage?
Many drivers assume that having full-coverage car insurance eliminates the need for gap insurance. However, full auto insurance coverage only pays for the car’s current value, not what you owe. Adding gap coverage can be a smart choice if your loan balance exceeds your car’s depreciated value.
Why is Gap Insurance Needed for Leased Vehicles?
Many leasing companies require gap coverage because it helps protect both their investment and yours. So, if you’re asking yourself, “Should I have gap insurance on a lease?” the answer is yes — especially if you want to protect yourself from paying off a car you can no longer use.
How Much Does Gap Insurance Cost?
Average Costs of Gap Insurance:
How much is gap insurance per month? When bundled into an existing auto insurance policy, gap insurance typically ranges from $20 to $50 annually. That’s under $5 a month for an average driver in the U.S. Things like your vehicle’s make, model, and location are also factored in.
One-Time Payments vs. Monthly Payments:
Some insurers offer a lower one-time payment option for gap insurance, which can be more cost-effective than paying monthly premiums. However, others may prefer a monthly plan for flexibility. It’s important to evaluate which option fits your budget and long-term needs.
Where Can I Buy Gap Insurance?
If you’re wondering how to get gap insurance, you have three main options, each with its own benefits and drawbacks:
- Car Dealerships: Many dealerships offer gap insurance when you finance or lease a vehicle — but at a premium. While adding the premiums for this protection into your car purchase is convenient, this approach often comes with a higher cost. Dealership-based gap insurance also tends to be rolled into your loan or lease, meaning you’re committed to that policy for the entire term, which can result in paying interest on it over time. So, the upfront price may outweigh the convenience in the long run.
- Insurance Companies: Alternatively, you can add gap insurance to your auto insurance policy through an insurance company. This option typically offers more competitive rates and the flexibility to manage your coverage separately from your car loan. Insurance providers often provide superior customer service and smoother claims processes. If you’re already insured, adding gap coverage is a simple step. If not — or if you’re looking to switch insurance providers, you’ll need to take the time to research the right policy that could save you money. Guided Solutions can assist by comparing top insurance providers to ensure you get the best deal.
- Stand-Alone Gap Insurance: For even more flexibility, stand-alone gap insurance allows you to select a policy independent of your vehicle purchase or existing insurance. This option provides more control over choosing your provider, and you never know, but it might result in lower premiums compared to car dealer-provided plans. Guided Solutions can also help you navigate the options for stand-alone gap insurance and get you the most cost-effective policy for your needs.
Not Sure if You Already Have Gap Insurance?
If you’re uncertain whether you already have gap insurance, review your auto insurance policy or contact your insurance agent for clarification. If your coverage was bundled with your vehicle loan or lease, gap insurance may have been added during the purchase process, sometimes without it being highlighted. To confirm, it’s a good idea to reach out to the dealership or finance company to check if gap coverage was included when you first financed or leased the vehicle.
Gap Insurance Refund: Can You Get Your Money Back?
When Is Gap Insurance Refundable?
If you pay off your loan early or decide to cancel your gap insurance, you might be eligible for a refund. Some companies offer prorated gap insurance refunds, so it’s worth checking your policy to see if a refund is available.
Gap Insurance Cancellation Process:
To cancel gap insurance, you’ll need to contact your insurer or dealership and provide your policy information. They’ll guide you through the process, and you may be eligible for a partial refund depending on the terms of your coverage.
Is Gap Insurance Worth It?
Gap insurance is a good add-on for nearly every driver, particularly those with loans or leases. It covers the difference between what you owe and what your car is worth if it’s totaled or stolen. By adding car insurance gap coverage, you avoid being stuck with payments on a vehicle you no longer have.
So, whether you’re leasing, financing, or simply concerned about depreciation, gap insurance could be the protection you need to put your mind at ease. For deeper savings, you might be able to bundle your car insurance policy with a home insurance plan.
Not sure how to begin? Let the auto insurance experts at Guided Solutions help you evaluate your options for car insurance gap coverage. Start today by us at (833) 791-4719, or request your free quotes now.