Q:
What is gap insurance and do I need it?
Answer:
Whether you lease or finance your car, gap insurance can provide valuable protection during the early years of your car's life. As we all know, a new car's value drops the minute you drive it off the lot. And unfortunately, if your car is totaled five minutes after you buy it, your insurance generally only covers the actual cash value of the car. So, there's a good chance the insurance check isn't enough to pay off your outstanding lease or loan balance, unless your insurance company offers Guaranteed Replacement coverage.
Gap insurance was created for just such a situation. If a "total loss" occurs (the car is stolen, costs more to repair than it's worth, etc.), gap insurance will pay the difference between the actual cash value of the car and what you owe on your loan or lease. Some lenders and leasing companies actually require you to carry gap coverage until the outstanding loan/lease amount drops below the value of the vehicle.
If you decide to purchase gap insurance, make sure you don't keep the coverage for longer than necessary. Once the outstanding balance on your loan or lease drops below the value of your vehicle, gap insurance becomes an unnecessary expense.
Gap insurance is typically not very expensive, since the coverage amount is relatively small. However, the cost will vary depending on the type and value of the vehicle you purchase, and from one insurer to another.