What is Gap Insurance?

The value of a new automobile begins to depreciate as soon as you drive it off the lot. If you total your new automobile during the first few years, you may owe the bank more than the car is worth. This disparity is covered by “guaranteed asset protection”, sometimes known as “gap” insurance.

Gap insurance kicks in if you finance your vehicle and file a complete loss claim — either after your vehicle are totalled (the cost of repairs would be more than the car is worth) or after it is stolen. When you file a complete loss claim, your insurance will pay a maximum of the vehicle’s actual cash worth (ACV).

In some situations, the amount you still owe in auto payments may surpass the ACV of your vehicle. This is referred to as having negative equity or being underwater on your loan. Gap insurance, also known as loan/lease payback insurance, assists you in repaying the debt in this case. Remember that just because your automobile is totalled does not mean that your loan is cancelled.

Cost of Gap Insurance

The cost of gap insurance varies, but it is often low. Gap insurance from the dealership may cost hundreds of dollars each year. When you add gap coverage to a vehicle insurance policy that already includes collision and comprehensive coverage, your annual premium will normally raise around $50.

Lenders and dealers determine the cost of gap insurance depending on your loan and the estimated depreciation of your car. For higher debts, gap insurance may be more costly. Car insurance providers compute the cost of gap insurance depending on your car and driving history.

Gap insurance only pays out if your total loss claim is granted and the settlement for your car does not cover the balance of your loan. If another motorist was at fault, gap insurance can also pay the difference between the insurance company’s settlement offer and the outstanding debt.

Some gap insurance policies also have a maximum payout amount. Progressive’s gap insurance coverage, for instance, covers up to 25% of the vehicle’s ACV. If your automobile has depreciated considerably, this gap payment may not cover the whole loan.

Is it worth buying it?

There is no reason to get gap coverage if your vehicle is not financed. If you finance your automobile, gap coverage may be a smart option, depending on how much you drive and how rapidly your car depreciates.

Keep in mind that automobiles depreciate quickly. According to the Insurance Information Institute, many automobiles lose 20% or more of their value in the first year of ownership. If you do not put a big down payment on your automobile, the amount you owe in car payments might rapidly exceed the value of your car.

There is no reason to get gap insurance if you are not financing or leasing your vehicle. However, in select cases, gap coverage may be worthwhile. You should think about gap insurance if you have paid a small down payment, drive a lot, long finance period and bought a car that depreciates fast.