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What Is Gap Insurance And How Does It Work?

Finance | 11/12/2021 23:00

Gap insurance (Guaranteed Asset Protection) is optional insurance that kicks in if your car is totaled or stolen. It essentially covers the “gap” between what you still owe on the car and the depreciated value of the car. Let’s look a little closer at how this type of insurance works, and when you should consider getting it.

Here’s everything you need to know about gap insurance and when it is worthwhile to have.

If you have a car loan, it is possible that the car may be valued at less than you owe on it. This is less than ideal, but it happens often enough with vehicle loans. This becomes a major problem if something drastic happens to your car. If your car is stolen or totaled and the insurance company only pays out what the car is valued at, it might not cover the amount that you have left on your loan. 

Insurance company payment

How Does Gap Insurance Work?

Gap insurance kicks in when there is a gap between what insurance will pay and what you still owe on the car. Say you take out a loan for $20,000 on your new car, and a few months later your car is totaled while it is parked outside your house. You file a claim with your insurance company, and they agree to pay $17,000. The $3,000 difference is ultimately your responsibility, even though the situation was completely out of your control. 

Gap insurance ultimately works in conjunction with comprehensive and collision insurance to minimize or eliminate your out of pocket expenses.

Do I Need Gap Insurance?

Gap insurance is not technically required, but that doesn’t mean you shouldn’t consider it. Let’s look at a few different types of insurance and when they are required:

  • Liability Insurance. This insurance is required by almost every state in the United States (excluding New Hampshire). It is composed of three parts: bodily injury coverage per person, bodily injury coverage per accident, and property damage coverage per accident. This covers any damage you may cause to another driver, their passengers, or their property, including their car.

  • Comprehensive Insurance. This covers the cost of damages to your vehicle if there is a non-crash accident, such as weather damage or theft. Comprehensive insurance also covers damage that occurs if you hit an animal. 

  • Collision Insurance. This covers damages to your vehicle if you hit or are hit by another vehicle.

Car accident collision

If your car is financed, you may be required to get all three types of insurance. Even so, it is possible that this may not cover all of the damages, and you could still owe money on your car even if it is totaled.

How Do I Decide If I Need Gap Insurance?

If your car is not financed, you do not need gap insurance whatsoever. If your car is financed, it depends largely on the expected depreciation of your car. It is important to remember that cars depreciate rather quickly, losing about 20% of their value in the first year alone. It is always worth checking Edmunds or Kelley Blue Book to see what your car is worth. Here are some factors that might help you decide if gap insurance is necessary: 

  • You put less than 20% as down payment on your car. This makes you more likely to end up with negative equity as soon as you leave the dealership. Your car depreciates the minute you leave the dealership, so if you only put down a low down payment, you might immediately owe more than the car is worth

  • Your car is a lease. Some leases require gap insurance in addition to collision, comprehensive, and liability.

  • You drive a lot compared to the average person in your area. This will cause your particular car to depreciate faster. 

  • Your car model has a tendency to depreciate fast. Some cars simply lose value faster than other cars, while some cars hold their value extremely well. Gap coverage might be worthwhile if your car model doesn’t hold its value particularly well.

  • Your car loan payment period is long. If your loan is 5 years or longer, there is a higher chance that your loan balance will exceed your car’s market value. Gap insurance can protect you from this depreciation.

How Much Does Gap Insurance Cost?

Like everything, the cost of gap insurance can vary greatly between insurance companies. If you go through your current provider, you can expect to pay a yearly flat fee of $500 to $700 for the coverage. If you finance through a credit union, you can expect a monthly add on of $20-$40. The following variables will affect the cost of gap insurance:

  • Where you live.

  • Your age.

  • Previous claims history.

  • Actual value of your car and total amount you owe.

If your insurance company does not offer gap insurance, you can purchase it as a stand alone policy from another provider. 

At AutoApprove, we work with lenders to get the best rates on gap insurance possible, usually around $14 per month. As far as insurance coverage goes, it offers a great return of investment should you ever need it to kick in.

Is Gap Insurance Really Worth It?

You will need to do the math to determine if gap insurance is worth the investment.  

  1. First, go online to determine how much your car is worth. Use sites such as Kelley Blue Book and Edmunds to get a value for your make and model. It is best to find an end of year value for each year of your loan.

  2. Take a look at your loan terms. See how much you will owe each year, and compare this to what your car will be worth at the end of each corresponding year.

  3. Calculate how much gap insurance will cost for each year.

  4. Look at the difference in your car’s value and what you owe at the end of each year. Based on this, determine how much gap insurance will save you in the event of a disaster. 

If there’s a good chance your car will depreciate faster than you will pay it off, you should strongly consider gap insurance. 

Gap insurance ultimately covers what collision and comprehensive insurance do not cover, and can protect you from depreciation.

At AutoApprove, we know that gap insurance can make good sense based on how quickly cars tend to lose their value. We work closely with lenders and help you shop around for the rates and coverage that fit your needs most. So if gap insurance makes sense to you, contact us today to see how we can help.


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