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Gap insurance

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If you are financing a vehicle with a loan or leasing a car, you might consider getting gap insurance. GAP insurance stands for Guaranteed Asset Protection. It’s designed to cover the difference in the amount of money you owe on your car and the car’s actual value if you get into an accident and your car is totaled.

How does gap insurance work? 

When you get into a serious accident, your insurance company will determine if your car is totaled. The designation is made based on the amount of insurance coverage you have and the current value of your car. That’s how the insurance company determines your payout. 

Car insurance policies cover the actual cash value (ACV) of your vehicle, meaning depreciation is factored in. Within the first year of owning a car, it loses roughly 20 percent of its value. When you finance a car through a loan or lease, you make monthly payments on the vehicle, meaning you don’t own it outright.

In some cases, the ACV of your vehicle could be less than what you owe your lender. For example, say you leased a car that was worth $20,000 when it was new. Three years later, you still owe $18,000. However, your car has depreciated significantly in those three years, and now its ACV is $14,000.

If you get into an accident, the insurance company will reimburse you based on the depreciated value of your car—$14,000 in this case. You still owe your lender more than the ACV value—$18,000. The money you owe the lender is more than it would cost to replace your car. This is when gap insurance comes in handy.

Gap insurance covers the difference between what the insurance provider will pay you after an accident, and the amount of money you owe on your car. Using the example above, say you have $14,000 worth of damage, plus a $500 deductible. With gap insurance, your insurance company would help pay the $3,500 difference you still owe on the lease, rather than you having to pay fully out-of-pocket.

How can I get gap insurance?

The process of getting gap insurance is slightly different than getting regular car insurance. There are three ways you can purchase gap insurance—through your insurance provider, your lender or a third-party company.

Through your insurance company

Most major auto insurance providers offer gap insurance. This can be purchased as an add-on to your existing car insurance policy. This is often the cheapest option.

Through your lender

You can get gap insurance through your car loan provider when you sign the contract. The fee may get added to your regular loan payments. Similarly, you can also get gap insurance through a car dealership that you’re leasing from. Dealerships usually offer gap insurance as a one-time fee upfront.

Through a third-party company

There are also third-party companies that sell gap insurance exclusively. That includes companies like Gap Direct or AAA.

Should I get gap insurance? 

Getting gap insurance is a personal decision. For some people, purchasing gap insurance is a good idea, and it could protect them from unwanted risk. However, gap insurance isn’t necessary for all drivers. There are several factors that you should weigh before deciding to purchase gap insurance.

Drivers who will benefit the most from gap insurance are people who are leasing a car or are paying back a car loan. Specifically, you need to determine how much your car is currently worth, compared to how much money you owe the lender. If you owe less than the market value, it doesn’t make sense to get gap insurance. But if you owe more than the current value, gap insurance is a good option.

Note that gap insurance can be beneficial for people who have either a new or used car. Both types of cars will depreciate more quickly than you might think. A car you purchased new will significantly decrease in value after a year or two, even if you haven’t had any accidents. 

How much does gap insurance cost? 

To get gap insurance, you will need to have an existing car insurance policy that includes comprehensive and collision coverage. Gap insurance is a separate policy that is paid for individually from your standard car insurance premium.

Having gap insurance will increase the amount of money you spend on car insurance, but not by much. According to the Insurance Information Institute, gap insurance usually adds about $20 to your insurance policy every year. Depending on where you purchase gap insurance, this could be a one-time fee or billed as a few dollars every month. The cost of gap insurance could also vary based on the provider that offers it. 

Regardless of where you get it, gap insurance is a low cost that can offer you valuable coverage. Without gap insurance, you could be on the hook for paying thousands of dollars to your lender, for a car that is totaled and unusable. 

The takeaway

For people who lease or finance their car, having gap insurance could be important. Getting gap insurance is a personal choice. To determine if you should get gap insurance, figure out what the current value of your vehicle is, and compare that to the amount of money you still lower your lender. If you owe more than the current value, gap insurance is a good investment.

If you’re in an accident and your car is totaled or if your car is stolen, gap insurance will help you pay back what you still owe on your car. You can purchase gap insurance through your car insurance company, through your lender or dealership or through a third-party company. Shop around to find the best deal before purchasing a policy.

If you’re on the fence about getting gap insurance, know that it won’t break your budget. At an average cost of only $20 per year, having gap insurance is a small price to pay for valuable coverage. Just make sure you have collision and comprehensive coverage before adding gap insurance to your policy.

Elizabeth Rivelli

Elizabeth is an insurance writer for coverage.com, where she covers insurance providers and reviews policies to help consumers find comprehensive and affordable coverage for every area of their life. She has more than three years of writing experience for top online insurance and finance publications.

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