When you buy a new car, it automatically loses about 9% to 11% of its value the moment you drive it off the dealer’s lot. At that point, you suddenly owe more money than your car is worth.
So, what happens if you total your new car right after you buy it? With standard minimum car insurance, you’re out of luck. That’s when Gap insurance can save the day.
What is Gap insurance?
Gap insurance is designed to cover the difference between what you owe on your totaled vehicle and any settlement you reach with an insurance company following an accident. Short for Guaranteed Asset Protection, Gap insurance is commonly required when leasing a car. The main benefit is that you aren’t left to pay a lot of money if you get into an accident while you owe more on your car than it’s worth.
What does Gap insurance cover?
Whenever you make a claim against your comprehensive coverage or collision insurance policy, your Gap insurance will come into play. Sometimes it will even pay your comprehensive or collision deductible.
Working in conjunction with your collision and comprehensive coverage, Gap insurance pays for damage to your vehicle for collisions with other vehicles, as well as the following perils covered under your comprehensive coverage.
Some states require car dealers to offer Gap insurance as a part of buying a vehicle. That makes it important to know what your vehicle is actually worth and how much your insurance company will pay you if it’s totaled.
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Do I need Gap insurance?
In most cases, Gap insurance will only be useful for the first two to three years that you own a car. After that, the car’s value will usually exceed what you owe. Generally speaking, you’ll no longer need Gap insurance when the following applies to your car:
- Your car has a low depreciation rate (such as an older-model vehicle)
- You have almost paid your car loan off
- You put down a large down payment (20% or more)
- You paid off the balance quickly
- You have enough money to easily replace the vehicle if it’s totaled
Can I get Gap insurance after I buy a car?
In many cases, Gap insurance is only worth buying within the first few years after purchasing a new car. It’s during this time that there is more likely to be a difference between what you owe and what the vehicle is worth.
Most car insurance companies won’t offer Gap insurance for a car that’s more than two to three years old. Some will only give the original owner of the vehicle Gap insurance.
How much does Gap insurance cost?
If you purchase Gap insurance at the dealership or through a bank, you’ll probably pay a one-time fee between $500 and $700. It’s usually much cheaper to get Gap insurance directly from your car insurance company. Expect to pay around $20 a year.
Factors that will influence the overall cost of Gap insurance include:
- The vehicle owner’s age
- The vehicle owner’s driving record
- The value of the car at the time of Gap insurance purchase
- The state in which the Gap insurance is bought
Is Gap insurance worth it?
While usually not required, Gap insurance may be worth the added expense. If you fall into certain categories it’s recommended that you get it due to its relatively low cost in comparison to the alternative of paying a lot of money out of pocket in the event of an accident.
Gap insurance is worth it if you fall into any of the following categories.
- You bought your car within the past year
- You put less than 20% down when financing your car
- The loan/lease period on your car is less than five years
- You rolled over what you owed on a previous vehicle into your new loan
- The amount you owe on your car loan is more than the value of the car
- You drive a lot (which causes a vehicle to depreciate faster)
How to add Gap coverage to your car insurance policy
If you decide to add Gap insurance to your current car insurance policy, the process is relatively simple. Considered a rider policy by many insurance companies, the coverage amends the terms of your basic policy to include the additional coverage.
In many cases, all you have to do is talk to an agent at your current insurance company and they will make sure that the coverage is implemented.
Once you have contacted your insurance agent and notified the company that you want to add Gap coverage, the agent will need to know the total amount of your car loan and how much you still owe. From there, it’s a simple process of adding the coverage to your policy.
Purchasing GAP insurance from the car dealership or lender is also straightforward. The agent or salesperson will tell you how much the coverage costs, and then you must decide whether you want to get it or not. In some cases, you have no choice in the matter, though you can usually decide whether you want to get Gap insurance from the dealership, lender, or an outside insurance company.