Gap insurance

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Guaranteed Asset Protection (GAP), commonly known as gap insurance, is an optional add-on to your car insurance policy that can provide crucial financial protection. For drivers with a loan or lease on a new vehicle, gap insurance can be a lifesaver by covering the difference between the amount you owe on your car and its depreciated value if your car is totaled or stolen. This coverage helps ensure you won’t be left paying off a loan or lease for a vehicle you no longer have, offering peace of mind and financial security in unforeseen circumstances.

What is gap insurance?

Gap insurance is optional car insurance endorsement that covers the “gap” between the amount owed on a vehicle and its actual cash value (ACV) in the event it is totaled, stolen or rendered a total loss from a covered claim. Although gap insurance is an option in most cases, if you have a loan or lease contract on your vehicle, your financial lender may require you to carry it.

Here’s how gap insurance works: say you have been involved in an accident and your vehicle has been damaged beyond repair and must be replaced. You still owe $18,000 on your auto loan, but the vehicle is now worth only $15,000. Gap insurance would cover the $3,000 difference between what you owe on your car and its current market value, after accounting for deductibles. Some policies also cover the deductible, but this is not always the case.

Remember that gap insurance typically applies only to vehicles that are brand new, or models less than a year old, that have been totaled or stolen. It does not cover accidents, damages, repairs or a sale or trade-off, even if the financed amount is higher than the value of the vehicle. It will also not help buy you another vehicle — you would need new car replacement coverage to cover the expenses of purchasing a new vehicle.

Who is eligible for gap insurance?

Gap insurance is generally available to drivers who have financed or leased a new or nearly new vehicle. If you owe more on your auto loan or lease than the car’s current market value, you may benefit from gap insurance. Typically, financial lenders or leasing companies will require you to have gap insurance if your loan-to-value ratio is high. This ensures that if your car is totaled or stolen, you won’t be left with an outstanding loan or lease balance that exceeds the car’s market value. However, it’s important to check with your insurance provider and lender for specific eligibility requirements and terms.

How much is gap insurance?

The cost of gap insurance is influenced by several factors such as your vehicle’s actual cash value (ACV), where you opt to purchase the coverage, your past insurance claims and the insurance provider you select. According to the Insurance Information Institute (Triple-I), adding gap insurance to a full coverage auto policy averages less than $100 per year. However, this is not a set rate, and individual rating factors like your vehicle’s value can influence the cost.

It’s generally more cost-effective to purchase gap insurance from your existing insurance provider rather than from a car dealership or lender. Car dealerships tend to charge more for gap insurance, and adding it to your auto loan could mean you need to pay interest on it — which can cost more in the long run. To ensure that you’re getting a good deal on your coverage, compare what you’re quoted from your car insurance provider and your dealership or lender.

Does gap insurance always pay out?

Gap insurance is designed to cover the monetary difference between the actual cash value of your vehicle and the remaining amount on your loan or lease if your vehicle is stolen or declared a total loss. However, it’s important to note that gap insurance is specifically focused on this “gap” and does not extend to other expenses such as personal injuries, vehicle repairs or damages to other vehicles. It’s also worth keeping in mind that gap insurance only comes into play when the loss of your vehicle creates a “gap” where the balance remaining on your loan or lease surpasses the actual cash value of your car.

When does gap insurance not pay?

While it’s an invaluable financial safeguard for drivers who owe more on their car than its market value, there are certain circumstances where gap insurance won’t provide a payout. These include:

• If the policy has expired due to nonpayment prior to the total loss event
• If any deceit or misrepresentation by the policyholder is detected
• If the claim is not covered within the terms of the policy
• If there’s a breach in the car loan or lease agreement terms
• During any predetermined waiting periods before coverage commences

It’s also worth mentioning that gap insurance typically does not cover deductibles unless it is explicitly stated as a provision for deductible reimbursement in the policy.

Where to buy gap insurance

Some auto insurers, like Geico, do not offer gap insurance, while others vary in how this protection is offered and how it works. Here’s a quick look at a few options from major auto insurers:

• State Farm: The largest auto insurer in the U.S., State Farm does not offer gap insurance but has Payoff Protector. Payoff Protector is included with every vehicle loan initiated by State Farm Bank, and if certain criteria are met, this feature can pay off the difference between your vehicle’s depreciated value and your remaining loan balance.
• Allstate: The Allstate gap program waives the difference between a primary auto insurance settlement and the outstanding balance owed on a vehicle. It waives covered losses up to $50,000 and reimburses a deductible payment up to $1,000. It is offered for new and used vehicles.
• Progressive: Progressive caps loan/lease payoff coverage at 25 percent of the vehicle’s actual cash value.
• Nationwide: Nationwide offers gap insurance but does not waive your deductible if you file a claim, so be mindful of whether your deductible is low enough that you can afford it in case of a total loss.
• AAA: AAA offers gap coverage for vehicles that are fully covered, including optional comprehensive and collision insurance.
• Esurance: Esurance (and some other auto insurers) refers to gap insurance as auto loan and lease coverage. You may qualify for coverage if you are leasing or paying off a financed vehicle and have full coverage insurance.
• USAA: USAA auto insurance is available to active-duty military, veterans and their immediate families. USAA offers Car Replacement Assistance, which includes an extra 20 percent above the vehicle’s actual cash value if it is totaled.
• Travelers: Travelers offers loan/lease gap coverage, which pays out the difference between the current value of your car versus what is owed.
• The Hartford: The Hartford offers gap insurance for new vehicles. Drivers must add gap insurance to collision and comprehensive coverage within 30 days of when the vehicle is purchased or leased.
• Liberty Mutual: Under Liberty Mutual’s gap insurance add-on, the coverage will pay the difference if your remaining loan amount is larger than your car’s actual cash value.

Is gap insurance worth it?

Gap insurance is often encouraged by lenders or auto insurance companies for new vehicles when or if:

• The auto loan has a length of five years or longer
• The loan has a high-interest rate because the principal on the vehicle will take longer to pay down versus the depreciation
• You paid a low down payment

It is generally recommended to compare what you will pay for your car over the life of your financing to the car’s MSRP or agreed-upon sales price and see if you have a gap from the start. In the event you do, gap insurance may be a good idea.

Keep in mind your “gap cost” is always fluctuating. Generally, the difference between what you owe and what the vehicle’s worth shrinks as you make monthly payments and as the car depreciates.

Other situations in which gap insurance might not be necessary:

• When there was a large down payment
• If the initial loan term was short — three years or less

You can cancel the coverage at any time — usually only once the amount owed on the vehicle is less than its market value — but insurance professionals recommend not canceling the coverage until the amount owed on the vehicle is less than its market value. If you are unsure of whether gap insurance is worth it, consider the risk. Gap insurance is fairly inexpensive and, in many cases, can be added to your existing full coverage policy for a nominal cost per year. That may be far less than the difference between your car’s value and what you owe in case of a major accident.

Gap insurance for leased cars

Like any car or SUV, leased vehicles depreciate quickly. Therefore, if you did not put much money down and still owe a sizable amount on your total lease payment, you will likely owe more than the vehicle is worth if you get into an accident. In this situation, gap insurance coverage for your lease might be a smart financial decision.

As with a purchased car, it may help you to compare your total cost — including taxes and anything else you rolled into the lease — to the vehicle’s MSRP to determine if you have a gap.

And just like a purchased vehicle, the difference between what you owe and what the car’s worth decreases as you make monthly payments and as the car depreciates. This means you may not need the coverage for your entire lease period. You may only need it for a few months, depending on your lease agreement.

What are some alternatives to gap insurance?

While gap insurance offers a crucial financial safeguard, there are other options that you might want to consider. These include:

• New car replacement: This insurance can replace your new car if it’s totaled within a certain timeframe, usually a year or less, and with a mileage limit, typically less than 15,000 miles.
• Better car replacement: This coverage allows you to replace your totaled car with a newer model or a car or a used vehicle with fewer miles.

These alternatives each offer distinct advantages and disadvantages compared to gap insurance, and the best choice depends on your specific circumstances and needs. Always ensure to weigh the costs and benefits before making your decision.

Frequently asked questions

• How do I get the best deal on gap insurance?

  You have a few options for where to buy gap insurance: through the dealership, a standard auto insurer, financing company or a specialty gap insurance company. A gap insurance policy through dealerships and lenders can be too expensive to make sense for some drivers, although it can be a convenient option. Shop around between the dealership, auto insurers and companies that specialize in gap insurance; your best deal may come from your existing car insurance carrier. If you already have full coverage, you may be able to add gap insurance for a marginal annual cost.
  

• Do you get money back from gap insurance?

  If you pay a vehicle loan off in full early, you may be entitled to a refund of the unused portion of your gap insurance. Some states require insurers to refund the premiums if, for example, a 36-month loan with gap coverage for 36 months is paid off in 24 months. In some cases, an insurer may not let you know if you are due a refund. Make sure to keep your payoff letter, the original contract or insurance information and an odometer disclosure statement. It is important to know an insurer’s refund policy before buying gap insurance. It could be helpful to contact your state commerce department or insurance commissioner’s office to learn about your state’s regulations beforehand or what to do if your insurer refuses to issue a refund.
  

• How does gap insurance work if your car is totaled?

  Gap insurance only provides financial protection for the gap between the actual cash value of a vehicle at the time of a total loss claim and the current amount still owed on an auto loan or lease. Total loss can vary by state law and/or by the insurance provider.
  

• Do I need gap insurance if I have full coverage?

  Many auto loan and lease agreements require the borrower to purchase gap insurance.

  While you might feel like your auto insurance coverage is robust, auto insurers typically do not offer any one policy called “full coverage” that is designed to protect you against every possibility. Instead, you can get more protection by layering different types of coverage (e.g., liability, collision, comprehensive) together. Adding gap insurance to existing coverage can be an excellent way for some drivers to have greater peace of mind. However, coverage needs and benefits will vary widely by driver.