What Is Gap Insurance? Do I Need It?
Gap insurance is a type of insurance coverage for newer automobiles that can be tacked onto your collision insurance policy. It is optional insurance coverage. It could pay the difference between the balance of a loan or lease on a car and what your insurance provider pays if the vehicle is considered a covered total loss.
Gap insurance is sometimes called gap protection. Basically, to be clear, it covers the difference between what you owe on your vehicle and how much it is worth. Not everyone needs gap insurance (sometimes called “totaled insurance”).
For most drivers, a standard car insurance policy offers enough protection to cover the cost if their car is vandalized, damaged, or stolen. However, if you total your car completely and the car’s cash value is less than the amount you owe on your lease or loan balance, the “gap” is not covered by insurance. Your car insurance company won’t pay out more than the vehicle is worth (before it was damaged) – so you will be responsible for paying that cost.
Gap protection is often referred to as insurance, but it is actually a debt cancellation agreement. It is meant to cover the difference between car value and a car loan. Before you put up money for gap protection, though, think about how a gap occurs and how you can close that gap.
Do You Need Gap Insurance?
Some people assume collision and comprehensive coverage offers total protection if their car is stolen or totaled. However, if they’re financing or leasing a new automobile and have a total loss, they could be in for a sad surprise. If you are financing a new vehicle, gap insurance is almost always recommended. If you are buying a used vehicle with cash, you probably won’t need it.
Who Should Get Gap Insurance?
It’s crucial to keep in mind that gap insurance is a specialty product. Most people aren’t going to require it. You’ll likely be able to skip it altogether. If you purchased the car in cash, it’s useless. And, if you put up a big down-payment at the dealership, there’s a pretty minuscule chance that you’ll ever see an “upside-down” on your loan.
Taking out a gap insurance policy is a good idea if:
- You have a loan payoff period of five years or more
- You’ve got a lease on the car
- The car you have has a history of quick depreciation
- You put a lot of miles on the odometer every year
- You put 20% or less down when you purchased the car
- You drive a brand new car (gap insurance isn’t recommended for used cars)
Even if you have a tiny amount of negative equity, gap insurance is a good idea. If you have the ability to pay the deficit from your own pocket, you might be better off just risking it. Gap coverage, like other types of insurance, is smart for people who wouldn’t be able to deal with a worst-case scenario.
Gap insurance is sometimes built right into car leases, so it’s a smart idea to look at the contract before you go out and get gap coverage on your own. You shouldn’t pay a premium for something you already have.
If you just bought a car with a sticker price of $40,000, you might be pretty happy with yourself and your spiffy new car. You put $1,000 down, leaving you with $39,000 to pay over a long period of time going forward in life. You wisely purchased collision coverage with a $500 deductible.
Sadly, a couple of months later, you total your car in an accident.
You file a claim. Your car insurance company tells you they’ll disburse a payment of $36,00 to cover your car’s total cash value. You breathe a sigh of relief, but then gasp when you realize you still owe $38,000 on your car! That leaves you owing $2,000, as well as a $500 deductible.
Gap Insurance To The Rescue
Gap insurance would cover the difference between what you owe and what your insurance provider is willing to pay for it. Gap coverage protects you from having to cover the difference.
In most cases, you can only use gap insurance if you’ve bought collision and comprehensive coverage.
Gap insurance is a great thing for people without a whole lot of money to deal with a worst-case scenario. It is a smart move for people that are too poor, young, or resource-less to deal with a terrible situation involving their car.
Most young people should look into gap insurance if they are getting their first car and have a protracted lease period. It will save them a boatload of money in the future (that they couldn’t afford to pay) should they get into a serious accident and total their car.
Final Word on Gap Insurance
Gap insurance can be an important and useful product, but only for people with serious negative equity in their vehicles. That will include drivers who put a tiny bit of money down or have a long payoff period. If you are looking for a good place to purchase gap insurance, check out our list of the top 5 companies to purchase gap insurance from.