Do I Need Gap Insurance If I Have Full Coverage?
Last Updated on September 15, 2023
If you are leasing or financing a vehicle, then you may need gap insurance even if you already have full coverage car insurance.
Gap insurance, also known as guaranteed asset protection (GAP) insurance, covers the difference between the value of your vehicle and the amount you owe for your car loan or lease.
All car loans and leases require full coverage car insurance. Many also require gap insurance.
Keep reading to find out everything you need to know about gap insurance and how it works with full coverage car insurance.
- Gap insurance covers the difference between the value of your vehicle and the amount you owe for your car loan or lease, which can be significant in the first few years of ownership.
- Full coverage car insurance does not cover this gap, and you may need gap insurance even if you have full coverage car insurance, depending on the terms of your loan or lease.
- Many loans and leases require gap insurance or include it in your monthly payments, so check your paperwork carefully before buying gap insurance separately.
- Gap insurance can provide extra peace of mind and protect you from paying out of pocket if your vehicle is totaled or stolen and you owe more than it is worth.
Yes, You May Need Gap Insurance Even with Full Coverage Car Insurance
If you have a car loan or lease, then you may need gap insurance. Many car loans and leases require gap insurance. In fact, many loans and leases have gap insurance built into your payments.
Even if you have full coverage car insurance, you may require gap insurance. They cover different things in different ways:
Full Coverage Car Insurance Covers Accidents, Theft, Vandalism, Vehicle Damage, Liability, & More: Full coverage car insurance includes liability insurance, collision coverage, comprehensive coverage, and certain other mandatory or optional coverages. It includes any legally-required auto insurance coverages (like bodily injury and property damage liability coverage) along with coverage for your own vehicle from accidents and other incidents.
Gap Insurance Covers the Difference in Value Between Your Vehicle and Your Outstanding Loan Balance: Gap insurance covers the difference – or “gap” – between the value of your vehicle and the amount you owe for your loan or lease. With most new vehicles, there’s a significant difference in the price you paid and the value of your vehicle during the first few months or years of ownership. Without gap insurance, you would need to cover this gap out of pocket.
Ultimately, full coverage car insurance and gap insurance cover different things and work in different ways, but many drivers are required to carry both – especially on new vehicles.
How Gap Insurance Works
To understand how gap insurance works and why you may need it, here’s an example:
- You buy a brand new car today from a car dealership for $50,000. You pay $5,000 down, then finance the remaining $45,000.
- Regardless of the value of your vehicle, you now owe the dealership $45,000. This is the amount you agreed to pay the dealership for the vehicle.
- As you drive the vehicle off the lot, its value drops immediately, and this value continues to drop significantly in the first few weeks and months of ownership. Your vehicle may have been worth $50,000 when you purchased it. After three months of ownership, however, your vehicle may only be worth $42,000.
- If you crash your vehicle and it’s a total loss, your insurance will only pay you the actual cash value of your vehicle, which is $42,000.
- However, you still owe $45,000 to the dealership to pay off your car loan. There’s a $3,000 “gap” between the value of your vehicle and the amount remaining on your loan.
- If you have gap insurance, then gap insurance would cover this gap. Gap insurance would pay the $3,000 difference, and you pay nothing out of pocket. If you don’t have gap insurance, then you would need to pay this gap out of pocket.
Check Your Loan or Lease Paperwork for Gap Insurance Requirements
Many loans and leases require gap insurance to protect the collateral of the loan (the vehicle).
Some loans and leases even have gap insurance built into monthly payments. Alternatively, you may be able to buy gap insurance from your own insurer to save money.
Check your loan or lease paperwork for the following:
- Check If Gap Insurance is Required: Your loan or lease paperwork should clearly state whether or not gap insurance is required. Many loans and leases require gap insurance, which means you need to carry gap insurance at all times or risk breaking the loan. However, not all loans and leases require gap insurance.
- Check If the Loan or Lease Payments Include Gap Insurance: If gap insurance is required, then your loan or lease may already have gap insurance payments built into it. This is particularly common on leases, but it also occurs with vehicle loans. You might see a gap insurance charge of $10 to 50 per month on each payment, for example.
- Check If You Can Bring Your Own Gap Insurance: If your loan or lease requires gap insurance and gap insurance payments are built in, then you’re good to go. You’re abiding by the terms of your loan or lease agreement. However, many drivers can save money by buying gap insurance through their insurer. Not all insurers offer gap insurance. However, buying gap insurance through your own insurer can help you save a significant amount of money compared to buying through a dealership or financing company.
Who Should Buy Gap Insurance?
Gap insurance may be a mandatory part of your car loan or lease. However, gap insurance is optional for some drivers – yet they still carry it.
Here are some of the people who could benefit from gap insurance.
- Anyone who put no money down or very little money down on a vehicle and chose a long payoff period. In this situation, your vehicle is likely worth significantly less than what you owe on the loan, which means there’s a larger “gap” between the two amounts. You could be stuck paying $5,000 to $10,000 out of pocket without gap insurance. Check the value of your vehicle versus the amount remaining on your loan or lease.
- Anyone with a loan or lease that requires gap insurance. If your loan or lease requires gap insurance, then you must carry gap insurance. Otherwise, you’re breaking the terms of your loan or lease, and you’re at risk of losing your vehicle.
- Anyone who wants extra peace of mind during the first few years of vehicle ownership. Even if gap insurance is not required, you may want to carry gap insurance during the first few years of owning a new vehicle for your own peace of mind. Gap insurance tends to be affordable, and it could give you peace of mind – especially if you’re concerned about a large gap between the value of your vehicle and the amount remaining on your loan or lease.
As your vehicle declines in value and you pay off your loan, you could drop gap insurance. Eventually, as vehicles age, the “gap” will shrink, allowing you to safely drop gap insurance without the risk of being under-insured.
Gap insurance is a type of insurance designed to cover the difference in value between your vehicle and the amount remaining on your loan or lease.
Many loans or leases require gap insurance even if you have full coverage car insurance. If your loan or lease does not require gap insurance, however, then you can choose whether or not you want to carry gap insurance based on your personal aversion to risk.
Check your loan or lease paperwork for gap insurance requirements. Or, contact your insurer today to ask about gap insurance.