What Is Gap Insurance and What Does It Cover?
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Gap coverage is a relatively low cost form of auto insurance that helps financially protect you in the early stages of car ownership when what you owe exceeds the value of your car. This is helpful because you could be losing a lot of money if your new car is totaled without gap insurance.
If that sounds complicated, don’t worry. It’s actually remarkably simple. But there’s a lot of important things to know about gap insurance, from what it is, to where you get it, to what it covers, to how much it costs. Read on to find out everything you need to know about gap insurance for your car.
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What is gap insurance?
Contrary to popular belief, gap insurance isn’t named that because it covers a gap, though it does do that. It’s actually an acronym that stands for “guaranteed asset protection” (though sometimes it’s called “guaranteed auto protection”).
Here’s how it works. When you buy a new car, there’s usually a period where you owe more money than the car is worth. This happens because cars depreciate the moment you buy them, often by 20 or 30 percent. Even if you’ve only put one mile on the car, the fact that it’s now a used car causes the value to plummet.
So if you buy a $40,000 car, by the time you park it in your driveway it might only be worth $30,000. If you purchased it with no money down, then you still owe $40,000, or $10,000 more than the value of the car.
If your car is totaled in that first week, your standard car insurance will only cover the value, which in this case is $30,000. That leaves you owing an additional $10,000.
That $10,000 is what gap insurance covers.
When should you buy gap coverage?
You don’t ever actually need gap insurance. It’s not insurance required by law, though many car dealerships require you to get gap insurance in order to make a purchase, since the car is their asset.
Once you have gap insurance, it’s only useful for as long as what you owe exceeds what the value of your car is. In general, this is for the first two or three years of ownership, but it really depends on your situation.
Here are some of the main factors that impact how long you’ll want to keep your gap coverage:
- The size of your down payment
- The length of your payment plan
- How long you’ve had the car
- How many miles are on the car
- How good of shape the car is in
MORE: Do I have gap insurance?
What does gap insurance cover?
Gap insurance just covers the difference between the value of the car and what you owe, and it only covers a car that has been totaled.
It doesn’t cover any damage to you or the car, so you still need standard car insurance to protect those things. Gap coverage does not replace car insurance, but rather, it works with it to protect your finances if you owe more money on your totaled car than your insurer pays out.
Does gap insurance cover you if you’re at fault?
It depends on the type of gap coverage you purchase. In some cases, the gap insurance only covers you if your car is totaled when you’re not at fault. But in many cases, gap insurance covers you regardless of how your car got totaled.
Where to get gap insurance
There are three places to buy gap insurance for your car:
- Through your car insurance provider
- Directly from the dealership or lender
- Through a third-party gap insurance seller
In general, it’s best to buy gap coverage through your car insurer, if you can. They usually have the best rates and allow you to pay for coverage on a month-by-month basis. However, not all car insurance companies sell gap coverage, so this may not be an option.
Directly from your dealership or lender is another good option, though usually a little more expensive, and sometimes a lot more expensive. Be warned that if you add gap coverage to your car payment plan, then you will likely be charged interest, just as you are with your car payments.
Third-party gap coverage providers often have good coverage, but usually require you to buy the coverage with one large payment. That payment is often cheaper than what a dealership or lender is offering, however.
How much does gap insurance cost?
The price of gap coverage depends on who you buy it from. If your car insurer sells gap coverage, then it’s usually just a few dollars a month. If you purchase the coverage from a dealership, lender, or third party, you can expect to spend anywhere between $200 and $700.
Gap coverage is a relatively low cost way of making sure that you don’t end up owing a huge sum of money if your car is totaled in the first few years of owning it. It may seem unnecessary, but it can make an enormous difference if something bad happens.
How long is gap insurance good for?
If you get gap insurance from your insurance provider, the coverage will be good for as long as it stays on the policy. However, if you get gap coverage from a dealership or lender, the coverage will probably only last for as long as the loan or lease.
Should you buy gap insurance?
If you have a new car that’s worth a lot of money, or if you only made a small downpayment on your new car, gap insurance is absolutely worth it.
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