Gap Insurance: What You Need to Know
When you purchase a car, you're often required to buy insurance to protect you in case of accidents or other incidents. But what happens if your car is totaled and the insurance payout isn't enough to cover what you still owe on your loan? This is where gap insurance comes in. In this article, we'll take a closer look at what gap insurance is, how it works, and whether it's worth buying.
Table of Contents
- What is gap insurance?
- How does gap insurance work?
- Who needs gap insurance?
- How much does gap insurance cost?
- Where can you buy gap insurance?
- Alternatives to gap insurance
- What to consider when buying gap insurance
- Pros and cons of gap insurance
- How to file a gap insurance claim
- Frequently asked questions
- What's the difference between gap insurance and regular car insurance?
- Do you need gap insurance if you have a lease?
- Can you get gap insurance after you buy a car?
- Does gap insurance cover a down payment or trade-in value?
- Is gap insurance worth it for a used car?
What is gap insurance?
Gap insurance (or guaranteed asset protection insurance) is a type of insurance policy that covers the difference between what you owe on your car loan or lease and what your car is worth in case of total loss. This can happen if your car is stolen or damaged beyond repair in an accident.
How does gap insurance work?
Let's say you bought a car for $30,000 and took out a loan for the same amount. A year later, you still owe $25,000 on the loan, but your car is now worth only $20,000. If your car is stolen or totaled, your regular car insurance policy will only pay you the actual cash value of your car, which is $20,000. This means you're still on the hook for the remaining $5,000 you owe on your loan.
If you have gap insurance, your policy will cover the $5,000 gap, so you won't have to pay anything out of pocket.
Who needs gap insurance?
Gap insurance isn't necessary for everyone, but it can be a good idea if you:
- Took out a loan with a small down payment
- Leased a car
- Purchased a car that depreciates quickly
- Purchased a car with a long loan term
If you own your car outright or have a loan with a low balance, gap insurance may not be necessary.
How much does gap insurance cost?
The cost of gap insurance varies depending on the car you have, where you live, and other factors. On average, gap insurance costs about 5% of the premium for your regular car insurance policy. This means if you pay $1,000 a year for your car insurance, your gap insurance would cost an additional $50.
Where can you buy gap insurance?
You can purchase gap insurance from:
- Your car dealership
- Your car insurance company
- A third-party insurance provider
Before you buy gap insurance, make sure you understand what it covers and how much it costs. You may be able to find a better deal by shopping around.
Alternatives to gap insurance
If you don't want to purchase gap insurance, there are a few alternatives you can consider:
- Pay off your car loan faster to reduce the gap between what you owe and what your car is worth
- Put more money down when you buy a car to reduce the gap
- Purchase a car that doesn't depreciate quickly
Keep in mind that these alternatives may not be as effective as gap insurance, especially if you have a long loan term or put down a small down payment.
What to consider when buying gap insurance
Before you buy gap insurance, here are a few things to consider:
- How much coverage do you need? Make sure you have enough coverage to cover the difference between what you owe and what your car is worth.
- How much does it cost? Compare prices from different providers to find the best deal.
- How long does the coverage last? Some gap insurance policies only cover you for a certain amount of time, so make sure you know how long you'll be covered.
- What are the exclusions? Make sure you understand what the policy covers and what it doesn't cover.
Pros and cons of gap insurance
Here are some pros and cons to consider when deciding whether to purchase gap insurance:
Pros
- Protects you from financial loss in case of a total loss
- Provides peace of mind knowing you won't be stuck with a car loan you can't pay off
Cons
- Adds an extra expense to your car ownership costs
- May not be necessary for everyone
How to file a gap insurance claim
If your car is stolen or totaled and you need to file a gap insurance claim, here's what you should do:
- Contact your insurance provider and report the claim.
- Provide all the necessary documentation, including your car insurance policy and loan agreement.
- Your insurance provider will investigate the claim and determine how much they will pay out.
- If there's a gap between what you owe and what your insurance provider pays out, your gap insurance provider will cover the difference.
Frequently asked questions
What's the difference between gap insurance and regular car insurance?
Regular car insurance covers damage to your car and liability if you're in an accident. Gap insurance covers the difference between what you owe on your car loan and what your car is worth in case of a total loss.
Do you need gap insurance if you have a lease?
Yes, if you have a lease, you should consider purchasing gap insurance. This is because you don't own the car and may owe more than the car is worth if it's totaled.
Can you get gap insurance after you buy a car?
Yes, you can purchase gap insurance after you buy a car. You can buy it from your car dealership, your car insurance company, or a third-party provider.
Does gap insurance cover a down payment or trade-in value?
No, gap insurance only covers the difference between what you owe on your car loan and what your car is worth.
Is gap insurance worth it for a used car?
It depends on the value of the car and how much you owe on your loan. If you owe more than the car is worth and can't afford to pay the difference out of pocket, gap insurance may be worth it.
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