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Gap Car Insurance: Should You Buy It?

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Gap insurance, also called gap coverage or gap protection, covers the difference between the current value of your car and the value of the car at the time of purchase. This protection is mostly intended for drivers who lease their vehicle. We take a deeper look at when and who should buy gap protection, and how you can save money on a gap policy.

Table of Contents

What is Gap Insurance and How Does it Work?

Gap insurance covers the "gap" between the current value of your car, and the value of your car when you first purchased it. Cars begin to devalue the moment they leave the dealership, often by several thousand dollars in the first few years. This depreciation is an issue for drivers who lease their car or take out an auto loan. When you lease or borrow money for a car, you are expected to pay back the original value of the car in a certain amount of time. If you total your car one year into your three year lease however, your car insurance company will only reimburse you for the value of the car at that time. In that year though, the car may have devalued by $1,000. Your leasing or financing company will be expecting you to pay for that extra $1,000. That's where gap insurance comes in.

Where Does the "Gap" Come From?

The gap comes from having negative equity in your car, which is just a way of saying you owe more in payments than what the car is actually currently worth. This is also referred to as being 'upside down' on your loan. The table below demonstrates how you may end up with a "gap" after crashing a car one year into a five year, 3% interest auto loan:

1

Car at Purchase$30,000

2

Car After 1 Year$19,600

3

Loan Amount$28,000

4

What is Left of the Loan After 1 Year$22,284

5

Collision Insurance Deductible$1,000

6

What Your Insurance Company Pays You$18,600 (2 - 5)

7

Gap: What You Still Owe$3,684 (4 - 6)

In this situation, crashing a year into that loan would leave you on the hook for roughly $3,700. For most people, that $3,700 is not readily accessible. If you had gap insurance however, that amount would be covered.

Should You Get Gap Insurance?

In the above example, the driver would benefit from having gap protection on their policy. Not every driver with a lease and auto loan will however. In the case above the driver took a large loan which basically encompassed the entire cost of the vehicle. If you got a smaller loan, like in the example below, you may be able to get away with not having gap insurance:

1

Car at Purchase$30,000

2

Car After 1 Year$19,600

3

Loan Amount$10,000

4

What is Left of the Loan After 1 Year$7,958

5

Collision Insurance Deductible$1,000

6

What Your Insurance Company Pays You$18,600 (2 -5)

7

Gap: What You Owe0

In this case the gap is negative, meaning you don't owe any money. The money your auto insurance company will pay you is greater than the amount you owe on your loan, so you'll be able to use that money to pay back the loan. Drivers should really consider gap protection when they fall into the following categories:

  • Your loan is close to the value of the car
  • Your loan/lease is for many years
  • Your car is highly valuable
  • You put little or no money down on your lease

Like in the first example above, the auto loan was nearly the same amount of the car. Cars, especially new ones, can depreciate by 30% in the first year, meaning it is likely your loan balance will not keep pace with the depreciation of the vehicle. If the loan or lease is for many years, that means the monthly payments are smaller. So even if you crash the car three years into the lease or loan, if you have only been paying off $100 per month for example, it is likely there is still a large chunk of the debt to still be paid.

If your car is worth a lot of money, say like a Ferrari or Lamborghini, the odds of being able to pay off that loan or lease in a short time is unlikely. Those cars tend to depreciate even faster than other cars, so you can be left with several thousands of dollars in the gap. Lastly, not putting a lot into your down payment means you will likely be 'upside down' from the moment you leave the dealership. A down payment would give you a good buffer from going "upside down".

If you are still unsure whether you should get gap insurance, we recommend doing some simple math. Like in the tables above, you need to figure out what your auto loan or lease payment and balance will be at every point in the next five years. Then you need to go to websites like Edmunds.com or Kbb.com to see how much your car may depreciate in that five years. When you compare the values, and see that you'll be 'upside down' more times than not in that five years, you should consider gap insurance. The final decision whether to actually get the insurance will depend on its final cost.

How Much Does Gap Protection Cost?

The exact pricing of a gap protection policy is hard to say, but what is certain is that you should try to never go through your car dealership. Car dealerships tend to charge several hundred dollars per year for gap insurance. Going through your auto insurance company is the much cheaper option. Auto insurance companies will generally offer policies for less than $100 per month.

How to Buy Gap Insurance

There are still a few more considerations you should make even after you have decided you need gap coverage. The first thing will be to check if the policy comes with a deductible. Remember the purpose of gap coverage is to reduce the amount of out of pocket costs you would face in the case of an accident. If a policy comes with a deductible, you will need to be sure you have enough cash at hand to pay it off. Also double check your policy for the fine print. You want to be sure that you will be covered in all cases. You won't want a policy that only covers certain accidents and not car theft for example. Also be aware of when the amount you owe on the loan or lease is less than the value of the car. When you leave the 'upside down' you no longer need gap coverage, and you should cancel the policy. Lastly, it's important to shop around for quotes. We go over which companies offer gap insurance in the next section.

Which Companies Offer Gap Coverage?

Many of the large insurance companies offer gap coverage at affordable prices. Notably absent from that list however is GEICO. Currently GEICO, the second largest auto insurer in the country, does not offer gap protection, leaving its customers to choose between expensive dealership bought gap coverage and no protection at all. The policies offered by the companies above are not without a few concerns though. Progressive and Esurance gap insurance, for example, will only cover 25% of the value of your car. So if you total your car worth $25,000, and your 'gap' is $7,000, Progressive and Esurance would only pay $6,250 leaving you to foot $750 by yourself. Allstate and several of the companies also only offer gap coverage to brand new vehicles.

  • State Farm^
  • Progressive
  • Allstate
  • Esurance
  • Farmers
  • Travelers
  • Nationwide
  • 21st Century

^ To qualify for State Farm's Payoff Protector® plan, you need to take an auto loan from the State Farm Bank.

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