Gap insurance provides valuable protection against out-of-pocket expenses you may incur if you are renting a car or if you owe more than your vehicle is worth on a car loan. In the event of a total loss, standard car insurance settlements are often insufficient, leaving a gap between what you receive from the insurance company and what you owe to the rental company or lender. Gap insurance helps you bridge that gap – hence the name.
What is Gap Insurance?
Gap insurance is a type of car insurance that covers the gap between what standard car insurance pays in the event of a total loss and what you owe to your lender or rental company. This can be essential in many cases because standard collision coverage and comprehensive insurance will only pay the actual cash value (ACV) of the vehicle at the time of the loss – regardless of how much you owe on the loan or lease.
Since new vehicles depreciate quickly, it is common for buyers to owe more than their cars are worth for a few years – meaning they owe more than the vehicle is worth. Gap insurance helps ensure that you don’t have a significant amount to owe if your car is completely destroyed or stolen during that time.
How Does Gap Insurance Work?
Once you realize there is a gap between the settlement you receive from your standard insurance provider after a total loss and what you owe to your lender or rental company, you should contact your gap insurance provider immediately. They will review the claim. Once approved, the insurer will pay the outstanding amount you owe up to your policy limit.
However, gap insurance typically does not cover the deductible of your standard insurance policy. That said, some gap policies may include deductible coverage, so it’s worth checking your policy terms or asking your insurance provider.
Let’s look at an example. If you wake up in the morning to find your car missing, you should report it as stolen. If you can’t recover it, you can file a claim with your insurance provider for reimbursement. However, the primary insurance provider will be responsible for covering the actual cash value (ACV) of the car at the time of the loss.
Let’s say you purchased the car for $30,000 and still owe $25,000 on the loan. But if the actual cash value (ACV) is $20,000, that’s all you will receive from your primary car insurance provider – leaving you with a shortfall of $5,000. In this case, you would contact your gap insurance provider and file a claim for the additional $5,000.
Where to Look for Gap Insurance?
Gap insurance helps reduce the risk of adding insult to injury after a total loss. You won’t have to worry about the amount you owe over the insurance payout for your car loan or lease. But where can you go to get coverage? Here are some options:
Purchase Gap Insurance from Your Current Insurance Company
You can check with the company that provides your current car insurance policy to see if they offer gap insurance. It can be convenient to deal with one company for all your car insurance needs. However, not all insurance companies offer gap insurance; for example, Geico does not provide this coverage.
Even if your insurance company offers gap coverage, it’s a good idea to get quotes from at least two or three other insurance providers to ensure you’re getting a good deal.
Purchase
Securing Gap Insurance Online
How can you shop around for gap insurance? It’s easy – many insurance providers list their gap insurance offerings online. Some well-known companies that offer gap insurance online include Liberty Mutual, AAA, Nationwide, Travelers, and State Farm, although the details and availability may depend on your state. Get several quotes and compare them side by side to find the best deal that fits your needs.
Buying Gap Insurance from the Dealership
If you buy or lease a vehicle from a dealership, you are likely to be offered gap insurance. Dealers often strongly recommend purchasing it from them and may mention a variety of reasons. However, as with any type of insurance, it’s best to shop around to ensure that you’re getting the best price and coverage for your needs.
Should You Buy Gap Insurance?
Whether or not you should buy gap insurance depends on your situation. In most cases, purchasing gap insurance is required when leasing a vehicle but not when financing it. However, exceptions may apply, so be sure to read your agreement carefully.
If it’s not required, the next question is whether you should get gap insurance or not. To make the decision, it’s important to think about what would happen if you didn’t have this coverage and your car was stolen or destroyed. To understand that, you will need to look at the actual cash value (ACV) of the car and how much you owe on the loan.
While depreciation varies based on the make, model, and year of the vehicle, new cars typically lose about 60% of their value on average within the first five years. It’s best to maintain gap insurance until the amount you owe is equal to the value of the vehicle. You may also want to consider factors such as your driving record and the crime rate in your area.
Note: Some dealerships and financing companies may bundle the cost of gap insurance into your lease or financing agreement. Be sure to read the agreement closely before purchasing additional coverage.
Gap Insurance vs. Loan or Lease Coverage
Some lenders offer loan or lease payoff coverage, which is similar to gap insurance, but there may be some important differences. Like gap insurance, loan or lease payoff coverage helps pay the difference between what you receive from the insurance provider and what you owe on the lease or loan.
However, it is essential to read the details carefully as loan or lease payoff coverage may have restrictions or other differences in coverage. For example, Progressive’s loan or lease payoff coverage only offers up to 25% of the vehicle’s value. If you owe more than 25%, you will still be responsible for some costs out of pocket.
How to Save on Gap Insurance?
If you need gap insurance, the best way to save money is by not purchasing it from the dealership. If you buy gap insurance from the dealership, the cost is usually rolled into the lease or financing agreement, which means you will likely pay interest on it.
Buying gap insurance from an insurance company saves you money because you can avoid paying interest on the coverage cost. Additionally, you can shop around to find the best deal and you can cancel the coverage at any time if you no longer need it.
Before purchasing this type of insurance, it’s also important to make sure that you actually need gap coverage. Check with your insurance company to see if gap insurance is already included in your policy. Then, crunch the numbers to find out if you would owe a significant amount in the event of a total loss. If you find that the cost of gap insurance outweighs the potential benefit, consider dropping the policy.
Questions
Frequently Asked Questions (FAQs)
How much does gap insurance cost?
The cost of gap insurance will depend on where it is purchased and your situation. A study from one insurance company found that gap insurance purchased from car dealerships costs between $400 and $900, while adding gap insurance to a car insurance policy costs between 5% and 7% of the comprehensive and collision premiums, which is much cheaper. However, as with all insurance costs, it depends on factors such as your state of residence, driving record, age, and more.
How do I know if I have gap insurance?
If you’re unsure whether you have gap insurance or not, you can start by checking your purchase or lease agreement from the dealership. If you purchased gap coverage from the dealership, it will be listed as an item in your contract. Next, check with your current auto insurance company to see if you have an active gap insurance policy. Finally, if you subscribed with a separate insurance provider, you can review your records or contact them to find out if it is still active.
How can I cancel gap insurance?
You can cancel gap insurance by contacting the policy provider and submitting a request. However, before doing so, check your purchase or lease contract to ensure it doesn’t require gap insurance. Also, make sure you understand the costs you would face in the event of a total loss without this coverage. If you cancel gap insurance after paying premiums that you won’t use, you may have a partial refund entitlement.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Progressive. “What Is Gap Insurance?”
Kelley Blue Book. “What Is Car Depreciation?”
Tricor Insurance. “What Is Gap Coverage?”
Source: https://www.thebalancemoney.com/where-to-purchase-gap-insurance-2645623
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