Cars and Trucks

Gap Insurance Companies: Everything You Need to Know

When shopping for gap insurance, look for policies from companies rather than banks or dealerships. This type of coverage is vital if you have a brand-new vehicle and carry a loan or lease on it.

What Is Gap Insurance?

If you finance or lease your vehicle and get into an accident, gap insurance protects you from having to pay extra money than the vehicle is worth. It’s only offered if you’re the original person listed on the loan or lease of the new vehicle.

Gap insurance is optional add-on coverage that can help drivers cover the difference between the amount of money they owe and the vehicle’s actual cash value (ACV) if they get into an accident. The ACV is the vehicle’s monetary value when the accident occurs, not its original price.

Many lenders require drivers who lease or finance a new vehicle to secure comprehensive and collision coverage until they pay the car off. Gap insurance works with either type of coverage. When you file a claim, comprehensive or collision coverage pays for the vehicle up to its depreciated value.

According to the Insurance Information Institute (III), driving a brand-new vehicle off the lot decreases its value immediately. Most vehicles depreciate approximately 20 percent in their first year. Gap insurance can cover the difference between what you owe on the loan or lease compared to the vehicle’s depreciated value.

Gap insurance coverage applies if you owe more than what the vehicle is worth when it’s involved in an accident or totaled. When a vehicle is totaled, it means the repair costs exceed the vehicle’s value.

How Does Gap Insurance Work?

Because an insurance policy only pays the ACV of the vehicle at the time of the claim or accident, you might owe money if you leased or financed the vehicle. Gap insurance would help you cover the difference.

For instance, if you purchased a brand-new vehicle for $25,000 but still owe $20,000 on the loan when you’re involved in an accident, your collision coverage would pay the lender up to the vehicle’s depreciated value. If the vehicle is worth $19,000 and you don’t have gap insurance, you would have to pay the $1000 difference. If you had gap insurance, your insurer would pay that amount.

Car insurance reimbursement goes directly to the lender to pay off a vehicle that’s no longer drivable. If you believe you’ll need help purchasing a new vehicle if you total your old one, consider buying new car replacement coverage. Some insurers sell these coverages together.

Can You Purchase Gap Insurance after Buying a Vehicle?

Depending on your vehicle’s model year, you might be able to acquire gap insurance after you purchase it. Many insurers offer this type of insurance as part of their policies. According to the III, gap coverage available through an insurer tends to be cheaper than at a dealership.

Some insurers, however, specify that you meet certain requirements:

  • You’re the car’s original owner.
  • The vehicle isn’t older than two or three model years.

    The III suggests you should consider gap insurance in the following situations:

    • You put less than 20 percent down for the initial payment.
    • Your auto loan lasts 60 months or longer.
    • You’re leasing a new vehicle.

      What Does Gap Insurance Cover?

      Gap insurance covers a variety of vehicle costs. It might cover theft if your vehicle is stolen and not found. It also covers negative equity, which is the gap between what you owe on the loan and the ACV.

      However, it doesn’t cover deductible costs, so you would still need to pay the deductible. It also doesn’t pay for engine failure or other mechanical repairs or cover bodily injuries, lost wages, medical expenses, or funeral costs.

      How Much Does Gap Insurance Typically Cost?

      Depending on where you purchase gap insurance, the cost can fluctuate. It’s usually cheaper to buy it from an insurance company than from a dealership or bank. According to CarInsurance.com, Progressive says it costs about $5 a month or $60 per year, while the III and Esurance claim it’s about $20 annually.

      Most advocacy groups discourage purchasing gap insurance from a dealership, as it typically includes an extensive markup price. CarInsurance.com states that the average markup cost on gap insurance from dealerships is approximately 150 percent, although in some instances it’s much higher. A study conducted by the National Consumer Law Center found that 38 dealerships hiked the price by an average of 300 percent.

      What Other Factors Should You Consider with Gap Insurance?

      Before you purchase gap insurance, check with your insurer to determine if you already have it as part of your policy. That way you’re not buying coverage you already have.

      If you decide gap insurance is no longer of value to you, contact your insurer to cancel the policy. For instance, if you’ve paid your loan down so your vehicle is worth more than what you owe, you should cancel the gap insurance coverage.

      What’s the Difference Between Loan/Lease Coverage and Gap Insurance?

      When you call your insurance company and it offers you loan/lease coverage, it might be referring to gap insurance. Ask the agent to describe the specifics of the coverage and how it can apply to you.

      The option to add gap insurance to your current policy might save you money, because you won’t be financing the cost of coverage along with your car loan. In addition, you might be able to cancel the coverage at any time, which is beneficial once you’ve paid down the loan.

      Gap insurance coverage can give you reassurance if you get into an accident with your new vehicle. Instead of being responsible for the difference between the vehicle’s ACV and the remaining amount on the loan or lease, the insurance covers the difference.

      Check this out if you need additional information, resources, or guidance on car insurance.

      Sources:

      Car Insurance | caranddriver.com

      What Is Gap Insurance? | iii.org

      Which Insurance Companies Sell Gap Insurance? | carinsurance.com

      Auto Add-Ons Add Up | nclc.org

      Is Gap Insurance Worth It? | caranddriver.com

      Car Insurance Deductibles: Everything You Need to Know | caranddriver.com

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