Have you ever wondered what gap insurance is? In this guide, we’ll explicitly explain what gap insurance is and how it works.
According to allstate.com, gap insurance is an optional car insurance coverage that helps pay off your auto loan if your car is totaled or stolen and you owe more than the car’s depreciated value.
Before we show you how gap insurance works, let’s define gap insurance.
Table of contents
- What is An Insurance With Gap Coverage?
- How Does Insurance With Gap Coverage Work?
- Do I A Car Insurance With Gap Coverage?
- How Much Does Gap Insurance Cost?
- What Does Gap Insurance Not Cover?
- How To Get Gap Insurance Coverage
- Car Insurance Companies That Provide Gap Coverage
- Are There Alternatives To Gap Insurance Coverage?
- Conclusion
- References
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What is An Insurance With Gap Coverage?
Gap insurance is a type of auto insurance that pays the gap between the insured value of a vehicle and the amount outstanding on the loan or lease if the vehicle is destroyed or stolen.
In other words, gap insurance will cover any difference between your auto insurance payout and the amount you owe on the vehicle if it is stolen before they entirely return the loan.
If your automobile is totaled or stolen and you owe more than the car’s depreciated worth, this optional car insurance coverage can help you pay down your loan.
Gap insurance, often known as “loan/lease gap coverage,” is only available if you’re the first owner of a new vehicle.
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How Does Insurance With Gap Coverage Work?
If your car is totaled or stolen, gap insurance will pay the difference between the car’s value and the remainder of your loan or lease if you have one. This type of insurance is only for drivers with a loan or lease.
Buying a car loses value the instant you drive it away from the dealer’s shop. A normal auto insurance policy protects the depreciated value of your car, such as gap insurance.
For example, if your $50,000 automobile is stolen and you have $65,000 in the bank, you have comprehensive insurance that will pay for the car’s value at the time of theft, but you must first pay a $500 deductible.
At this point, the gap insurance is meant to pay the final $5,500, so you don’t owe money on a damaged car.
Essentially, gap insurance covers the difference between what a vehicle is currently worth (which your standard insurance will pay) and the amount you actually owe on it.
While lenders may mandate comprehensive and collision coverage, gap coverage is usually not.
If your lender requires you to purchase gap insurance, the Consumer Financial Protection Bureau recommends you check your sales contract to see where that need is stated.
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Do I A Car Insurance With Gap Coverage?
If you don’t lease or have a loan, or if your loan covers the value of your car, you don’t require gap insurance.
However, if you have a lease or a recent loan, consider whether you can afford to pay the difference between the sum and the car’s value.
You may benefit from gap coverage if you can’t or don’t want to deal with that situation in an emergency.
According to allstate.com, gap insurance works in tandem with collision coverage or comprehensive coverage.
According to Insurance Information Institute, your brand new car loses its value the very moment you drive the vehicle off the lot. And most vehicles’ value depreciates about 20 percent in the first year of ownership.
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How Much Does Gap Insurance Cost?
Gap insurance costs vary depending on the motor insurer. Most motor insurers charge as low as $20 per year and as little as a few dollars each month. Several criteria, such as the worth of your vehicle, determine this cost.
According to United Policyholders, a nonprofit consumer group, lenders charge a fixed premium of $500 to $700 for gap insurance, though credit unions may charge less.
If you add coverage to your loan, keep in mind that you’ll also have to pay interest on it. According to Edmunds, the average financing rate on a new car is around 6%.
This means that three years of gap coverage from a dealer might cost over $800 compared to $60 from your insurance company.
The prices and interest rates of gap insurance vary, so compare prices with your dealer and car insurance provider.
What Does Gap Insurance Not Cover?
There are some cases where gap coverage will not pay out. Here are some instances that aren’t covered by gap insurance;
- When a vehicle is totaled owing to the driver’s intoxication, gap coverage rarely pays out.
- If they deny your total loss claim, your gap insurance will not pay out. For example, a driver with gap insurance can claim they stole their automobile, hoping their insurance will cover the expense. Gap will not pay if the insurer accuses the driver of hiding the automobile and refuses the claim.
- Gap does not completely pay out if the driver is behind on car payments. Instead, late car payments and fees are misused from the amount that would have been sent to the driver.
- Gap does not cover medical expenses or property damage incurred because of the accident that resulted in the car being totaled. In other words, gap coverage is designed to pay the difference between the amount owed and the car’s value.
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How To Get Gap Insurance Coverage
They often obtain gap insurance at the same time as comprehensive and collision coverage, though coverage may be available after you purchase a vehicle.
However, some insurers have limitations for buying gap insurance, such as the car being two or three model years old.
Most auto insurance companies provide gap insurance, and your automobile dealership may also provide it.
Gap insurance can also be obtained through a driver’s lender, though United Policyholders says lenders charge a set amount for gap coverage of $500 to $700.
Finally, drivers can add gap coverage to their existing automobile insurance policy for as low as $36 per year.
Car Insurance Companies That Provide Gap Coverage
Gap insurance can be purchased through the following auto insurance companies:
- State Farm
- American Family
- USAA
- Liberty Mutual
- Nationwide
- Allstate
- Esurance (owned by Allstate)
- Safeco
- Progressive
- AAA
- Travelers
Are There Alternatives To Gap Insurance Coverage?
There are many other ways to protect your car if it is stolen or totaled other than gap insurance.
Here are other alternatives you can consider:
1. Loan/lease payoff:
Despite the fact that some insurers use the terms interchangeably, loan/lease repayment differs from gap insurance in several key ways.
Gap coverage is only provided if you purchase a new vehicle; however, pre-owned autos may be eligible for a loan or lease payment.
Furthermore, instead of paying your debt sum, the loan/lease payment pays a percentage of the value of your car, usually around 25%, on top of the claim check.
2. New car replacement insurance
If you feel more uncomfortable buying a new vehicle than paying off your old one, new car replacement coverage might be the better choice despite its high cost.
This type of coverage helps you pay for a new car of the same make and model, minus your deductible, to replace your vehicle with a new one. This sounds pretty cool, right?
3. Better car replacement coverage
You may be unable to purchase new car replacement coverage or gap insurance if you don’t have a new car.
Should the worst happen, your insurer may be able to provide a better car replacement to cover your loan debt.
Conclusion
Unless your lease or loan agreement specifies otherwise, gap insurance is usually optional.
However, if you’ve recently spent a lot of money on a new car, it could provide you peace of mind.
References
- nerdwallet.com – How Does Gap Insurance Work?
- fool.com – What Is Gap Insurance and How Does It Work?
- allstate.com – What Is Gap Insurance and How Does It Work?
- investopedia.com – Do You Really Need Gap Insurance?
- creditkarma.com – What is gap insurance?
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