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Gap Insurance – How does it work and why do you need it?

Gap insurance is required when you are debited more than the car’s worth or when your vehicle is robbed or totaled. This guide will answer all your questions related to gap coverage for your vehicle, including how much does it cost.
Gap Insurance
Gap Insurance – How does it work and why do you need it?
Gap insurance is an uncompelled car insurance coverage that will help you pay your auto loan during difficult situations. Here's a detailed guideline on how gap insurance works and is it worth it?
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Gap insurance for cars is an optional coverage that helps pay off your auto loan in case your vehicle gets stolen or totaled and you owe over its belittled value. 

Gap insurance is an uncompelled car insurance coverage that will help you pay your auto loan during difficult situations, for instance, when your car is stolen or totaled.

When you report a succeeding claim, your inclusive or collision coverage will pay for your vehicle’s actual cash value (ACV), subtracting your deductible. The gap coverage will cover the difference between your vehicle’s ACV and the outstanding stability of your loan or lease. The cost for gap coverage differs from insurer to insurer.

What is Gap Insurance for Cars?

Gap insurance also known as “loan/lease gap coverage,”

Gap insurance pays the gap between the belittled value of your car and what you are still indebted to the car. If there is a limit for your gap coverage, it will conceal a part of your outstanding balance in case you are debited a lot more on the vehicle than the worth of it. 

However, remember the gap insurance for cars does not cover additional charges related to your loan, including mileage charges or finances. If your vehicle has been in an accident and there is damage, gap insurance doesn’t cover that.

gap-insurance
Source: Harlingencarcrashattorney

At any time, if you decide on leasing or want to finance a new car, many lenders require that you have an impact and inclusive coverage on your car insurance policy. This will remain until your vehicle is paid off. As soon as the new car is driven, there is a decrease in its value.

If you still have to give more loans or leases than the required depreciated value of the vehicle, that is when gap insurance may help you.

Why Do You Need Gap Insurance?

You might need gap insurance if you are underwater on your auto loan. Gap insurance is required when you are debited more than the car’s worth or when your vehicle is robbed or totaled. Sometimes, it also depends on specific laws in your state and your insurer’s policies to affirm if your car totaled.

The moment you add gap insurance, it holds good for the duration of your policy. However, you may only need gap coverage for part of the length of the loan.

When you owe less than the car is worth, you can decline the insurance. It is better to know the average depreciation rate for your vehicle. This will help in making you know if you need gap coverage.

Also Read: Gap Insurance in New York

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How Does Gap Insurance Work?

Imagine you purchased a new car for $25,000. When your vehicle is totaled in a protected collision, you are still debited $20,000 on your auto loan.

The collision coverage will be paid to your creditor for the totaled car’s depreciated value of $19,000. If you don’t have gap insurance, you will have to pay $1,000 from your pocket to undertake your loan on the totaled car. Your insurer will help you pay the $1,000 if you have gap insurance.

In the given example, the insurance reimbursement for the car completely goes to your auto lender. This will help in paying off a vehicle that is not drivable anymore. After your car is totaled, if you need help buying a new car, you can consider purchasing further car replacement coverage.

Also Read: Gap Insurance in Georgia

An example of how the gap insurance coverage works:

New car price$50,000
Loan balance after one year (4% APR/5-year loan)$24,000
Actual cash value after one year$20,000
Insurance payment without gap coverage$20,000
Deficit$4,000
Gap insurance payment$4,000
Source: WalletHub

When Do You Need Gap Coverage?

You may consider getting gap insurance for your car in the following situations: 

  • If you have made less than a 20 percent down payment on your vehicle.
  • The loan you have taken for your auto is more than 60 months or longer.
  • Many contracts already have gap coverage if you plan on leasing a car. 
  • It can be necessary when there’s a significant difference between your car’s value and what you are indebted to.
  • The more time your vehicle is financed, the better the chance of getting more on it than its actual worth.

Your gap insurance can help protect you against negative equity at the time of renewal if you are indebted more on a loan than the worth of your car.

Also Read: Gap Insurance in Arkansas

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How Much Does It Cost?

The cost of gap insurance coverage can vary from insurer to insurer. You can get a loan/lease payoff coverage quotation, similar to gap insurance, from your insurers.

You can consult your insurance provider for the best car insurance quotes online or offline. However, average gap insurance can cost anywhere between $400 and $700 if you buy from a dealership. On the other hand, adding coverage to your car insurance policy can cost between $20 and $40 per year.

Various dealers offer gap insurance for both financed and leased cars. In some instances, you can pay interest on your gap coverage if you make bundled lease/loan payments. Therefore, it is advised to buy gap insurance through your auto insurer.

Also Read: Differences Between GAP Insurance and New Car Replacement Coverage

What is the average cost of gap insurance for a car?

The average cost of gap insurance varies depending on how you purchase it:

  • Through Your Auto Insurer: The most affordable option, typically around $20-$40 per year when added to your existing comprehensive and collision coverage.
  • Through Dealer/Lender: Expect a one-time fee ranging from $500-$700 (sometimes even higher), often rolled into your loan with interest.

What is the maximum coverage limit for gap insurance?

Some insurers may set a maximum coverage limit as a percentage of the vehicle’s ACV, often up to 125% or 150%, but this can differ among providers. The maximum coverage limit for GAP insurance varies depending on the policy you choose and the insurance provider. Here’s what you need to know:

  • No Universal Maximum: There isn’t a single, standard maximum coverage limit across all GAP insurance policies.
  • Percentage-Based: Many policies cap your payout based on a percentage of your car’s actual cash value (ACV) at the time of the total loss. A common limit is 125% of ACV, but some policies offer higher percentages.
  • Vehicle Purchase Price: Some GAP policies, especially those called Return to Invoice (RTI) or Return to Invoice Plus, might cover the difference up to the original purchase price of your vehicle.
  • Finance Agreement Considerations: Certain types of GAP insurance, like those covering lease contracts, may be limited to a maximum claim amount that aligns with your potential financial liability under the lease agreement.

Does gap insurance cover additional charges related to the car loan or lease?

Coverage TypeDescriptionTypically Covered?
Unpaid balance of loan/leaseThe core function of GAP insurance – covers the difference between the car’s actual cash value (ACV) and the remaining loan/lease balance if the car is totaled or stolen.Yes
Insurance DeductibleSome GAP policies include coverage for your collision or comprehensive insurance deductible.Yes
Past-due loan/lease paymentsCertain policies may cover past-due amounts included in your loan balance, depending on the policy specifics.Potentially
Late fees and penaltiesLimited coverage might be available for fees associated with the remainder of your loan or lease agreement, depending on the policy.Potentially
Taxes and registration feesSome GAP policies may reimburse unused taxes and fees, but this depends on the specific policy and your state’s laws.Potentially
Costs beyond finance agreementGAP insurance does not cover expenses outside the finance agreement, such as repairs, medical expenses, or lost wages resulting from an accident.No
Extended warranty costsCosts associated with any warranties purchased along with the vehicle are considered separate expenses and are not covered by GAP insurance.No

Is Gap Insurance Required?

No state or federal law requires drivers to carry gap insurance. But if you finance or lease a new car, it is advised to purchase it. While funding a vehicle, the lender holds the ownership until your final payment. If your car gets damaged or stolen before you pay off your loan, the lender can lose money.

Gap insurance is worth the effort if you have financed a vehicle with a small down payment, have a long-term car loan, or have leased a vehicle. It is a simple and cost-effective method to protect yourself from significant financial risk. However, this coverage may not be worth it if you have already paid off most of your loan balance. 

Also Read: How does car insurance work

Can You Get Insurance After Buying New Car?

You can buy gap insurance after purchasing a new car, depending on the vehicle’s model year. Many insurers offer gap insurance as part of the car insurance policy. Purchasing gap coverage from an insurance firm can cost less than buying from a car dealership. 

You can check you’re your insurer for qualifications required for you to get the gap insurance coverage for your car.

Also Read: How Do I Know If I Have Gap Insurance

Conclusion

To sum it up, gap insurance for cars is an optional coverage that covers the “gap” between the amount you own on the car and its actual cash value (ACV) if it is totaled or stolen. While it is optional, it may be times when your loan or lease contract mandates gap insurance.

It does not cover any damages, accidents or repairs during a sale or trade-off, but only those cars that are new or less than a year old models stolen or totaled. 

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Picture of Aniket Kulkarni

Aniket Kulkarni

A seasoned Product Manager specializing in car insurance content, Aniket has a passion for simplifying complex insurance concepts. His strategic approach to content development reflects years of experience in the product development industry, coupled with a commitment to providing accurate, reliable information.

Editor

This page is purely informational. Beem does not provide financial, legal or accounting advice. This article has been prepared for informational purposes only. It is not intended to provide financial, legal or accounting advice and should not be relied on for the same. Please consult your own financial, legal and accounting advisors before engaging in any transactions.

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