Is Gap Insurance Worth It? A Look Into The Cost And Coverage

Category: Insurance

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7 min read

Gap insurance offers coverage for the difference between a vehicle’s insured value and the loan balance that the owner should repay. It acts as a supplemental auto insurance policy that offers a payout for the money that you owe.

This type of insurance is available for either leased or purchased vehicles; however, many vehicle owners ask, “Is gap insurance worth it?” Some find it especially useful when you owe more money than the auto insurance policy payout in case of lost or stolen vehicles.

This article will explain why having gap insurance is worth it.

Gap Insurance By Definition

Gap insurance accounts for the difference between the vehicle’s value when it is stolen and the loan or lease balance. “Gap” is an acronym for “guaranteed asset protection.”

You need to purchase coverage for comprehensive and collision to qualify for gap insurance. It can also account for your insurance deductible.

Collision and comprehensive insurance only cover the vehicle’s value during the accident occurrence. Any excess costs can be a burden, but gap insurance provides a backup.

Gap insurance offers supplementation on the collision coverage the payout should your vehicle gets lost or stolen.

Suppose you lease a vehicle using a car loan. If your car gets totaled, the collision insurance will pay $15,000. This amount corresponds to the vehicle’s current value without the deductible.

In case you still owe a certain amount on your loan, then gap insurance would contribute by paying for the remaining part.

How Does Gap Insurance Work

Vehicles can depreciate fast upon years of usage. An average car can lose up to one-third of its market value after driving for two years.

Policies do not pay for replacement expenses of brand-new vehicles for wrecked vehicles. Insurers account for the vehicle’s actual cash value by comparing your car to the car’s value being sold in a used-car lot.

Gap insurance uses real cash value as a basis for payouts. Replacement values are disregarded and are not covered by gap insurance.

Why Do I Need Gap Insurance

Purchasing new cars can be costly, and the prices of car loans are also increasing. With this in mind, it is not a good idea to skip having collision and comprehensive insurance for your car.

It is recommendable to have gap insurance as a form of supplementation to your collision insurance while you still owe more than the car’s cash value. Your collision insurance policy payouts for this amount in case your vehicle is caught in an accident.

Most car owners experience the same situation when they put down less than twenty percent on the car and elongated the loan term’s repayment to more than five years.

You can view the Kelley Blue Book to check if you need gap insurance. This book will help you determine if your car is worth less than the loan balance, which will require you to get gap insurance.

Is Gap Insurance Worth It?

Is Gap Insurance Worth It?

Suppose you placed minimal money down on a purchase and paid the remaining balance through monthly installments over five years. You can expect that you do not fully own the car yet unless you have paid in full.

Paying the principal increases your share for ownership and decreases your debt. Gap insurance is worth the money for the time you are in debt with a value that is greater than the car’s worth.

Gap insurance helps in providing coverage if you are caught in an accident that damages your car. Though it may not be for everyone, it does cover plenty.

It is worth having gap insurance if:

  1. You leased a vehicle rather than purchasing it.
  2. You only paid for a small down payment or have not put any cash down for the car.
  3. You have a long duration of loan payoff.
  4. You drive your car regularly, which decreases the car’s value faster.
  5. You chose a car with a fast depreciating price.

Most of those who need this insurance owe more money on a vehicle than the payout that insurance companies give in case of theft or damages to the car.

Upon purchasing gap insurance, you should monitor your loan balance regularly and cancel the insurance when your debt becomes less than the vehicle’s book value.

You can cut your auto insurance costs by canceling gap insurance once you do not need it anymore. This way, you get to save some money and use it in more important things instead.

That, of course, should not be done randomly. It is best to consult with your adviser when canceling on any premium.

When You Should Not Get Gap Insurance

Gap insurance is sensible for people with significant negative equity for their vehicles. Car owners who already placed down payments and those who agreed to have a short loan payment period are included.

You should be wise in determining if you need gap insurance and if it applies to you.

There are times when it is not recommendable to get gap insurance. Most of these circumstances are the opposite of the situations mentioned earlier. You should not get gap insurance if:

  1. You already gave twenty percent of the car’s value as a downpayment.
  2. Your car loan payment period spans less than five years.
  3. Your vehicle is a historical model with more excellent value than average cars.

Concerns on Gap Insurance

Most car owners have concerns about getting gap insurance. Here are some of the most common answers to help you get the answers you need.

What is the Usual Cost of Gap Insurance?

Most gap insurance can be an additional policy worth $20 a year to a comprehensive auto insurance policy. The gap insurance cost varies depending on the existing insurance laws in every state.

The insurance pricing is also affected by the client’s driving record, age, and vehicle model. Most insurance providers price five to six percent of the collision and comprehensive premiums.

You can either go to a dealer, lender, or insurer to get gap insurance; however, it is recommendable to get it from an insurer since it is cheaper than the other options.

Only get an insurance policy from trusted companies as well. Although some may look like a good deal for its price, not every company is the same.

It pays to do your research not only on cost but background as well. Know when the company was established, how many people have purchased them, and other legal documents.

I Have Full Coverage. Do I Still Need Gap Insurance?

Although comprehensive auto insurance offers full coverage, it does not cover the amount you owe on loans. It only covers accidental damages to your car and pays the actual cash value of the vehicle.

With this in mind, you still need gap insurance to cover the difference even if you have full coverage. Gap insurance covers the gap in what you owe and the car’s worth on a used lot.

During the first few years of car ownership, it is most recommended since your vehicle will depreciate. You have the option to cancel your gap insurance when your collision insurance can fully cover your loan balance.

How Can I Acquire Gap Insurance?

The simplest way is to inquire with your auto insurance provider if they can add a gap insurance policy to your existing auto insurance policy. The offers differ depending on the insurance provider.

Research for gap insurance prices online to get the deal that suits your needs and budget.

When Can I Get Gap Insurance?

You can get gap insurance after buying a car. Contact your auto insurance provider to inquire if you can add gap insurance to your present insurance policy.

Final Takeaway

Gap insurance is exceptionally beneficial for people without down payments. It is also for those with those long payoff duration or with anyone on a lease rather than a purchased vehicle.

Not surprisingly, many people will owe loans with a value that is more than a car’s current value. Luckily, insurance companies can give you the help you need.

It is not worth having gap insurance if you already made a twenty percent down payment or a short car loan payment period. Gap insurance is an optional policy that gives assurance to people who need financial assistance.

If you know someone who is also contemplating getting gap insurance, share this article. Share You can also help us out by sharing this article on Facebook and Twitter.

Liked this post? You can read more on auto insurance-related topics that can also be useful to you. Make sure to check out these other great content:

  • 5 Steps to Get Your Auto Insured
  • The 5 Best Auto Insurance Companies [2020]
  • Car Owner’s Guide: How To Get The Cheapest Car Insurance Rates

Let us know in the comments if you have learned something new today. Feel free to share any other valuable information regarding gap insurance that is not mentioned in this post.

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