When you purchase a car insurance policy, you typically have the option to customize your coverage with endorsements, like accident forgiveness or roadside assistance. If you lease or finance your car, one of the most common endorsements is gap insurance, which can come in handy if your vehicle gets totaled before it's paid off.
However, not everyone can buy gap insurance. For example, if you finance a used car that's more than a few years old, you may not qualify for gap insurance coverage. You should also consider the cost before purchasing a gap insurance policy.
If you're wondering whether gap insurance is worth it, here's what you need to know before making your decision.
- Gap insurance isn’t required, but it can be worth it for drivers who lease or finance their vehicle.
- The cost of gap insurance is low if you're buying gap insurance through your car insurance provider.
- You can drop gap insurance once your vehicle's value exceeds your loan balance.
- Gap insurance is usually only available for vehicles that are new or a few years old.
How gap insurance works
Gap insurance, which stands for guaranteed asset protection, is an optional car insurance policy for drivers who lease or finance their vehicle with a car loan.
If a car is totaled or stolen before the car loan is paid off, gap insurance covers the difference between the car's depreciated value and the amount of money you still owe.
Many major insurance companies offer gap coverage, including American Family, Liberty Mutual, Nationwise, State Farm, Travelers, and USAA.
Do you need gap insurance?
Gap insurance isn’t always necessary. There are a handful of situations in which you should purchase gap insurance for your car, says David Adler, president of the Adler Insurance Group, a Denver-based insurance carrier.
Gap insurance can be a good investment if you lease or finance your car and have negative equity, including if you gave a small down payment. In layman's terms, negative equity means you owe more money on the car than what it's worth.
And remember, cars depreciate as soon as you drive off the lot -- you might be surprised to learn that your car is worth less than what you imagine.
How do you qualify for gap insurance?
There is no formal qualification process for gap insurance, but not all drivers can get this type of coverage.
If you lease or finance a brand new car or a car that's only a few years old, you should be able to buy gap insurance. However, insurance providers don't usually sell gap insurance for used cars that are more than three years old.
Also, gap insurance isn’t sold to drivers who own their vehicles outright since there’s no reason to have gap coverage.
When do you need gap insurance for your car?
Gap insurance on a lease or loan is never a legal requirement. However, having gap coverage is useful in certain situations.
Here are some of the scenarios in which you might decide to purchase a gap insurance policy:
- You recently leased a new vehicle.
- You finance your car with a loan.
- Your loan repayment period is five years (60 months) or longer.
- Your down payment is less than 20% of the car's purchase price.
- You bought a vehicle that has a high rate of depreciation.
When can you skip gap insurance?
Even if you have an car loan or lease, you don't necessarily need gap insurance. If you own your vehicle outright, you can definitely skip gap coverage.
However, you can also decline gap coverage if you put down a large down payment on the vehicle, are financing the car for a short period of time, or have a car that is known to hold its value.
Frequently Asked Questions
How much is gap insurance a month?
The cost of gap insurance depends on a few factors, including the value of your vehicle, the car insurance company, and your location.
The good news is that gap insurance cost isn't much.
"Most insurers will only charge a few dollars each month for gap insurance,” Adler says.
Should you buy gap insurance from a dealer?
If you're deciding where to purchase gap insurance, it's almost always a better deal to get coverage through your car insurance company rather than a dealership.
"A dealership will likely charge you hundreds of dollars a year for your gap coverage, while an insurer will likely charge you no more than $40-$60 per year. If you want to save money on your gap insurance, then just tack it onto your existing auto policy,” Adler says.
Can you get gap insurance on any car?
You can buy gap insurance on a used car, but it depends on the model year and the mileage. Auto insurance companies usually don’t offer gap insurance for vehicles that are more than three years old.
So, if you purchase a new-to-you vehicle that's 10 years old, you probably aren’t eligible for gap coverage.
How could you owe more than what your car is worth?
For the first few years of an auto loan or lease, you typically owe more money than what the vehicle is actually worth. The reason why you can owe more than the car's actual cash value (ACV) is because of depreciation.
Here's an example. Imagine you purchase a new car for $40,000, and you finance the entire $40,000 purchase with an auto loan. As soon as you leave the car dealership, your car depreciates and is now worth $37,000. Therefore, you owe $3,000 more than the car is worth.
Let's look at another example. Say you purchase a car for $25,000 and take out a $15,000 loan. After two years of ownership, your car gets totaled in an accident. The car's depreciated value plummets to $10,000, and you still owe $12,000 on the car. You would have to pay the $2,000 difference out of pocket, or gap insurance pays it.
How long do you need gap coverage?
You need gap insurance until you no longer have negative equity in the vehicle. At some point, the value of your car will be greater than what you owe on it. If your car got totaled or stolen, your insurance payout would cover the remaining loan balance in full.
