Many things will determine whether gap insurance is worth it to you, including cost, coverage options, available providers, whether you qualify, and other factors. Although fairly inexpensive, gap insurance is a particular type of coverage used only when a new vehicle you’ve financed is totaled or stolen. So is gap insurance the right choice?
What is gap insurance?
Guaranteed Asset Protection or gap insurance is supplemental coverage, in addition to your comprehensive and collision coverages, that pays the difference between your car’s actual cash value, or “ACV,” and the amount you owe currently on your loan or lease when your car is Totaled in a traffic accident or stolen, according to Investopedia.
For example, suppose you financed or leased a new vehicle and your vehicle totals in one year. At the time of the accident, the ACV on your car is $10,000, but you owe $13,500 on your loan. After your $500 deductible, gap insurance covers the $3,000 discrepancy. Although rare, some gap policies will also cover your deductible.
Do you need gap insurance?
According to the balance, if you’re not sure if gap insurance is right for you, consider these criteria:
- Do you owe more on your car loan than your car is worth?
- Did you put down a small down payment or no money for your new car?
- Have you obtained a loan with a term of more than two years?
- Do you drive more than the average person in your area?
- Are you renting your car?
- Does your car depreciate faster than other cars?
If one or more of these common situations apply, gap insurance may be the right decision. If the value of your vehicle falls below what you owe on your loan, you won’t need to purchase gap insurance and must cancel it if you already have it.
Gap insurance may not be necessary if any of the following apply:
- You made a down payment of at least 20 percent of the value of the car at the time of purchase.
- You expect to pay off your car loan in less than five years.
- You financed or leased a vehicle that holds its value longer than most.
Get gap insurance
There are several ways to purchase gap insurance. According to NerdWallet, you can purchase your gap insurance through your insurance provider as additional coverage, through an insurance company that provides gap insurance for a one-time fee, or your dealer or lender may provide gap insurance. through your loan payments.
According to Nationwide, many lenders and dealers require gap insurance and will include it in the price of the lease or loan. However, this usually costs more in the long run because you’ll be paying interest on your gap insurance. Gap insurance on its own is often purchased online as a one-time purchase. Generally, you can’t buy gap insurance if your car is more than three years old or if you’re not the original owner, although there are exceptions.
Most insurance providers require you to have collision and comprehensive coverages to purchase a gap policy. You most likely have collision coverage if you’re still paying off your car loan, and most companies require collision insurance when they rent a vehicle.
What is the cost of gap insurance?
The cost of your gap insurance depends on several factors. If you get your gap coverage from a lender, you can expect to pay a flat fee of $500 to $700 on average. However, if you finance through a credit union, it may be less expensive, but you will pay interest on your insurance with a credit union. Experian found that auto insurers typically charge $20 to $40 a month for their add-on policies.
Here are the variables that determine your gap insurance costs:
- The actual cash value of your vehicle when you purchase your gap policy.
- Your age.
- Where do you live.
- Your previous claim history.
gap insurance providers
Talk to your insurance provider about your gap insurance options. If your insurance company does not provide gap coverage, you may need to contact another insurer for separate gap coverage.
Here are some of the top insurance companies that offer gap insurance:
- state farm
- Auto Owners Insurance
- American family
- mutual liberty
Other insurers sell gap insurance or comparable products as part of a car lease or loan. You can buy gap insurance from State Farm if you get financed directly through your bank, but you can’t get a regular auto policy this way.