If you don’t know what car gap insurance is, don’t feel bad. A November 2017 survey by car-buying app Instamotor shows 62 percent of car shoppers can’t define what car gap insurance is.
We’ll fill your knowledge gap when it comes to gap insurance, including when you need to buy gap insurance.
Understand how car GAP Insurance works
What does GAP stand for? GAP insurance is short for guaranteed asset protection. It’s available for both new and used cars.
Licensed insurance adjuster Veronica Castillo of Tacoma, Wa., explains that whether you have a car loan or lease, gap insurance covers the difference between what you owe and the vehicle’s cash value.
If you have a car that’s totaled, is heavily damaged, or gets stolen, your insurer pays the cash value of your car, not what you owe on the loan or lease.
If you have it, gap coverage bridges the “gap” between the insurance payout and the amount you owe. You’re “upside down” or “underwater” on a loan or lease if you owe more than your car is worth.
Who should buy GAP Insurance
Not every driver needs car gap insurance. First, figure out whether you owe more on the car (including taxes and fees) than it’s currently worth, advises David Griffin Jr., vice president of The Dowd Agencies, an insurance provider in New England.
“If covering the difference out of pocket if you lost the car due to an accident or theft would be a hardship, a gap policy makes sense,” Griffin says.
Keep in mind that the difference between what you owe on your car and what it’s worth will decrease over the life of the loan or lease. So, you might not need car gap insurance during the entire time you finance a car, according to Griffin. In other words, you might be able to cancel the coverage at a later date.
Tom Simeon, a personal injury attorney in Washington, D.C., says gap insurance is “vital for someone who made a small down payment or did not trade in a vehicle on a new car and, instead, financed all or nearly all of the purchase.”
If you pay cash for a car or finance it with at least 20 percent down, gap insurance normally isn’t needed, Castillo says.
According to car-buying website Autotrader.com, gap insurance is designed to cover you when you owe more than a car is worth. But that likely won’t apply in these two scenarios.
Tips to know if you need GAP Insurance
The Insurance Information Institute says other instances when it makes sense to consider car gap insurance are:
- If you financed a car for at least 60 months.
- If you bought a car that will depreciate quickly. Nolo.com says that certain new cars lose as much as 30 percent of their value within the first three months of ownership.
- If you rolled over negative equity from an old car loan into a new loan.
When you lease a vehicle, you typically are required to have gap insurance, the institute says. Also, keep in mind that some standard auto policies already include gap coverage.
By the way, gap coverage is available in most, but not all, states. To find out whether gap insurance is sold where you live, contact your state’s insurance department.
How much GAP Insurance costs
The Insurance Information Institute says your car dealer might offer gap insurance. However, most car insurers offer it, too, and they typically charge less than a dealer will.
For most policies, lumping gap coverage with collision and comprehensive adds about $20 to your annual premium, according to the institute.
“Because it’s not a one-time charge, you continue paying for the coverage with every premium, until you cancel it,” Nolo.com says. “So, don’t forget to calculate, now and then, whether you’ve closed the gap and can forgo the additional expense.”
Nolo.com says if you buy gap insurance from a car dealer, the cost typically comes as a one-time charge. It may add up to a few hundred dollars. Always shop and compare premiums before buying a gap policy.