What is gap insurance?
The “gap” in gap insurance stands for “guaranteed auto protection.” Stemming from the fact that your vehicle loses value as soon as you drive it off the lot, it’s easier just to remember that this coverage fills a potential financial gap for new car owners.
If you lease or finance your vehicle with little money down, you may quickly end up owing more than your car is worth. In the event of theft or a car-totaling accident, gap insurance will cover the difference between the value of your vehicle and how much you owe. The vehicle’s value—decided by the insurance company—is based on the current market value, which takes into account both Blue Book pricing information and prices advertised by car dealers.
How gap insurance works
The coverage process for gap insurance is relatively simple: It becomes a part of your regular car insurance claim filing process. To illustrate, here’s an example of a situation without gap insurance:
- You have an accident that totals your car.
- Your standard auto insurance policy pays you $12,000, the current market value of your car.
- You still owe $20,000 on your car loan. This means after the reimbursement you still owe $8,000 for a demolished car you don’t own.
Yikes, that could sting. But if you had purchased gap insurance beforehand, the policy would reimburse you the $8,000 difference. You just pay whatever deductibles might apply to your car insurance policy.
Do I need gap insurance?
Although you are not required to have gap insurance, it’s something you should consider purchasing in certain situations. You’ll need to weigh the risks of owing money after the accident with the cost of paying for a gap insurance policy.
Here are the scenarios in which gap insurance is a good choice:
- You purchase or lease a new or only slightly used vehicle.
- You buy a significantly high-value vehicle.
- You didn’t make a down payment on your auto loan.
- You don’t have money in the bank to cover the potential value gap in case your car is totaled.
What gap insurance doesn’t cover
It’s important to understand what gap insurance won’t cover. These are the most notable examples:
- Auto insurance deductibles
- Down payment for new car
- Extended warranties
- Rental cars
Gap insurance won’t make up the difference if you sell your car for less than it’s worth. It also doesn’t help you if you suffer a financial hardship and can’t afford your car payments.
How much does gap insurance cost and how do I get it?
Like car insurance, the cost of gap insurance varies depending on where you live, your insurance company, and your demographics. However, the coverage is relatively cheap when you purchase it from a car insurance company—usually just a few dollars per month on top of your auto policy.
One thing we advise against is buying gap insurance from car dealers. They may charge you $500 to $1,000 and require payment at the time you purchase your vehicle. Fortunately, you can avoid getting a shady deal by getting gap insurance from your current insurance company or the bank or credit union that finances your loan—likely at a much lower cost.
If you think gap insurance is right for you, contact a insurance company for a quote—like Safeco, which offers plenty of discounts and low rates for many of its customers. Or call 855-462-2213 to get multiple quotes from an Obrella-approved licensed sales agent now.