Gap Insurance Explained so You Can Decide Whether or Not to Buy Gap Insurance
The concept of insurance is a gamble: you pay for something you may never need. But when disasters happen, insurance can be a complete blessing. Choosing gap insurance for cars is one of those gambles many people aren’t sure whether to take or not.
To help you decide is gap insurance worth it for you, we have created your ultimate guide to understanding gap insurance coverage.
If you want to know how gap insurance works, we will provide everything from a gap insurance definition to a detailed breakdown of these following questions and more:
- What is gap insurance?
- How does gap insurance work?
- Is gap insurance on a lease required?
- What does gap insurance cover?
- Is gap insurance worth it?
- Can you buy gap insurance online?
After you read though this article on gap insurance explained, you will have a better idea if you should buy gap insurance, whether it is gap insurance on a lease or purchased vehicle, this year.
What Is Gap Insurance? A Gap Insurance Definition
Before we get further into the discussion of gap insurance coverage, we want to answer the most important question you might be asking: What is gap insurance?
Here is a basic gap insurance definition: Gap insurance coverage is a form of car insurance to protect the “gap” between what your regular car insurance covers and what you owe on your recent car purchase or lease in the event of your car being totaled or stolen.
Gap insurance for cars can be needed due to the nature of quick value depreciation in vehicles.
How Gap Insurance Works: Gap Insurance Explained
Now let’s break down that gap insurance definition to fully understand how gap insurance works.
Cars depreciate quickly. In fact, it is estimated that a brand-new car will depreciate by 11% of its value the second you drive it off the lot. Let’s use an example to see this depreciation in action and to have gap insurance explained.
Say you buy a car that is $25,000. It may only be worth $22,250 a few seconds after driving it. And after owning your car for one year? It could be down 19% of its value, bringing that car down to $20,250.
If you get into an accident and the car is totaled, your car will be valued at those low numbers, but your auto loan is still for $25,000. The car insurance payout will not cover all of your debt; they will only give you back what it is now worth.
If you buy gap insurance, however, the gap insurance on a lease or purchased car will pay for the “gap” between that depreciated value and what is on your car loan (while your regular auto insurance will still cover the current market value).
How Gap Insurance Works: Gap Insurance on a Lease
So far we have discussed gap insurance coverage for cars that are purchased with an auto loan. But gap insurance on a lease is especially necessary.
If your leased car gets totaled, the insurance payout will only cover the current market value of the car. You will have to cover the difference between the current value and what is on your lease.
This could be thousands of dollars out of your pocket. And it is why, in most cases, gap insurance on a lease is required.
In fact, in some cases, the gap insurance on a lease will be automatically included in the contract. In these cases, you will not have to worry about going out and purchasing your own gap insurance coverage.
What Does Gap Insurance Cover?
It is important to answer the question of what does gap insurance cover clearly, so you will also be able to know what gap insurance coverage does not cover.
If you buy gap insurance, the following problems will be covered:
- Theft: This is only covered if the car is unrecovered
- Negative Equity: This is the difference between what the car’s depreciated value is and what you still owe on your loan.
What is gap insurance not covering?
- Mechanical repairs such as engine failure
- Death, injury, or other medical expenses
- Regular car insurance deductibles
- Car repossession
- Rental cars
- Extended warranties
It is important to always remember that gap insurance coverage is not just an added layer of regular auto insurance. It has one purpose only: to make sure you have all the money need to pay off your auto loan early or if your car is totaled or stolen.
Will You Always Need Gap Insurance for Cars?
There is another important factor to consider when deciding whether or not gap insurance coverage is worth it for you.
You will not always have to buy gap insurance for your car. At some point, you will not have to worry about your “gap,” and it should be dropped.
Let’s go back to our original example of the $25,000 car. Each month you will pay more on the car. Eventually, you will have significant equity in that car.
This means if you total your car, the regular auto insurance payout can be more than you owe. At this point, you may consider dropping your gap insurance coverage payments.
In contrast, gap insurance on a lease will always need to be there for the duration of your lease. This is the only way to keep you safe with a car you will never build equity in.
How Much Does Gap Insurance Coverage Cost?
It is helpful to look at how much it really costs to purchase gap insurance. You may be able to better answer is gap insurance worth it for yourself once you know exactly how much you should expect to pay.
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For those who are getting gap insurance on a lease, this will help you decide where to buy gap insurance. For those getting gap insurance coverage for a car they are buying, this will help you decide if gap insurance is worth it for you.
- If you buy gap insurance from your dealership, the cost will often be between $500 and $700.
- If you buy gap insurance from your lender, the cost will often be between $250 and $300.
- If you buy gap insurance from your car insurance company, the cost will often be approximately $20 a year to $60 a year.
As you can see, it is probably not a good idea to ever purchase gap insurance from a dealership.
But it could be worth the time to research what your lender will charge for gap insurance coverage versus what your auto insurance dealer will charge. These choices sometimes will allow you to buy gap insurance online as well.
Is Gap Insurance Worth It?
So now let’s answer the top question we have been working our way up to: Is gap insurance worth it? The short answer is that it truly depends on your situation.
- When it comes to gap insurance on a lease, it is always worth it to buy gap insurance. No matter what, you will still have to pay what you owe on the lease.
- But when it comes to gap insurance for cars you own, it is more up to your discretion. You are not required to purchase a replacement car of the same value. So you can more easily take a gamble.
When Gap Insurance Coverage Is Worth It
There are plenty of times when choosing to buy gap insurance is worth it. This can be a good insurance gamble to make. It can save you from being in the difficult position of needing to pay out-of-pocket on an auto loan for a car you do not even have anymore.
As we have mentioned multiple times, if you are getting a lease, gap insurance on a lease is always worth it. But there are other times when gap insurance or cars is a great idea too.
Bankrate mentions a few groups of people who might want to buy gap insurance. Gap insurance coverage may be right for you if you…
- Have a lease (again, gap insurance on a lease is a must)
- Financed for a long period of time (60+ months)
- Have a low down payment (down payments help offset depreciation)
- Put your negative equity from your last vehicle into your new loan
- Use your car frequently (more than 15,000 miles each year)
- Choose a vehicle that depreciates more quickly than others
You may be able to better answer the question “Is gap insurance worth it?” for yourself once you know exactly how much you should expect to pay, so make sure to get quotes for your particular car before purchasing it.
When Gap Insurance Coverage Is Not Worth It
While we aim to help you find out when gap insurance coverage is worth it, it is equally important to let you know when gap insurance for cars may not be worth it.
There are a few circumstances where gap insurance for cars is probably not worth it. They include:
- If you pay your car cash, you will not have to worry about paying back a loan if your car is totaled or stolen and unrecovered. Normally, people are told never to buy gap insurance coverage in this case.
- If you can easily afford to pay for the gap between your car’s current market worth and what is left on your car loan, you do not need to gamble and purchase gap insurance you may never need.
Then there are some circumstances where gap insurance for cars may not be worth it. You will have to determine if you want to gamble and buy gap insurance:
- If you financed your car for a short period of time, you will quickly owe less than your car is worth, and regular auto insurance coverage will provide all you need.
- If you put a significantly large down payment on your car, the chance of having any “gap” at all between your loan and the car’s worth is significantly low.
- If you do not drive very much, your car will not depreciate as quickly.
Conclusion: Should You Buy Gap Insurance?
Now you can answer the questions of what is gap insurance and what does gap insurance cover. You also have a better idea of how gap insurance works, so it is time to figure out if you should purchase gap insurance for your car.
Take time to assess your current financial situation when it comes to your car.
If you will be leasing your car, absolutely consider getting gap insurance on a lease. It will always be worth it for you.
If you will be buying your car, decide if the relatively small cost of gap insurance for cars is worth the confidence of knowing you will be able to afford a full replacement in the event of your car getting totaled or getting stolen and unrecovered.
For those who want the assurance of knowing your “gap” will be covered, you may want to buy gap insurance online, through your lender, or through your auto insurance company this year.
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