When considering the value of gap insurance, several factors should be taken into account, such as the associated costs, coverage options, available providers, eligibility criteria, and more. In this comprehensive article, we will provide you with all the necessary information about gap insurance and suggest the top car insurance companies that offer reliable gap coverage.
What Is Gap Insurance?
Also known as Guaranteed Asset Protection, provides supplementary coverage alongside your comprehensive and collision insurance. It serves to bridge the gap between the actual cash value (ACV) of your vehicle and the outstanding amount you owe on your loan or lease in the event of a total loss due to an accident or theft, as explained by Investopedia.
For instance, let’s say you financed or leased a new car, and within a year, it is totaled. At the time of the incident, the ACV of your vehicle is assessed at $10,000, while your outstanding loan amount is $13,500. After deducting your $500 deductible, gap insurance would cover the remaining $3,000 difference. It’s important to note that although uncommon, some gap policies also cover the deductible itself.
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How Does It Work?
To better understand the concept of gap insurance, consider this scenario: Let’s say you have a financed vehicle and still have a remaining balance of $10,000 on your loan.
Unfortunately, you’re involved in an accident that results in your car being deemed a total loss. According to the insurance claims adjuster, the actual cash value (ACV) of your car is assessed at $8,000, and your insurance company issues a check for that amount. However, thanks to gap insurance, the remaining $2,000 needed to fully pay off your auto loan balance is covered.
The moment you drive a new car off the dealership lot, its value begins to depreciate. If, within the initial years of ownership, your new car is totaled, you may find yourself owing more to the lender than the actual worth of the vehicle. T
his is where gap insurance, also known as guaranteed asset protection, comes into play, bridging the gap between the car’s value and the loan amount.
Do You Need Gap Insurance?
The Balance provides some criteria to consider when determining if gap insurance is suitable for your situation:
- Do you owe more on your auto loan than the value of your car?
- Did you make a minimal or zero down payment for your new vehicle?
- Have you taken out a loan with a term longer than two years?
- Do you drive more than the average mileage in your area?
- Are you leasing your car?
- Does your car depreciate faster compared to other vehicles?
If one or more of these common scenarios apply to you, it may be beneficial to opt for gap insurance. However, if the value of your vehicle drops below the loan balance, purchasing gap insurance becomes unnecessary, and you should consider canceling it if you already have it.
Gap insurance might not be necessary if any of the following conditions are met:
- You made a down payment of at least 20 percent of the car’s value during the purchase.
- You anticipate paying off your car loan within a period of fewer than five years.
- You financed or leased a vehicle that retains its value better than most.
Getting Gap Insurance
There are various ways to obtain gap insurance. According to NerdWallet, you can add it as coverage through your existing insurance provider, purchase it separately from an insurance company for a one-time fee, or your dealership or lender might offer it as part of your loan or lease agreement.
Also, Nationwide suggests that many lenders and dealerships may require gap insurance, incorporating it into the overall lease or loan cost. However, this can be more expensive in the long run as you will be paying interest on your gap insurance.
Alternatively, you can purchase gap insurance independently online as a one-time purchase. Note that there may be limitations on buying gap insurance for vehicles older than three years or if you are not the original owner, although exceptions can exist.
Most insurance providers mandate having both collision and comprehensive coverages to be eligible for a gap policy. If you are still repaying your auto loan, you likely already have collision coverage, as it is typically a requirement when leasing a vehicle.
What Is The Cost of Gap Insurance?
The cost of (gap) insurance is influenced by various factors. When obtaining gap coverage from a lender, the average flat fee ranges between $500 and $700.
If you choose to finance through a credit union, the cost might be lower, although interest will be added to your insurance premium. According to Experian, auto insurers typically charge around $20 to $40 per month for their additional gap insurance policies.
Several variables contribute to determining the cost of your gap insurance:
- The actual cash value (ACV) of your vehicle at the time of purchasing the gap policy.
- Your age.
- Your location.
- Your previous claims history.
Gap Insurance Providers
To explore (gap) insurance options, it is advisable to discuss with your insurance provider. If your current insurer does not offer gap coverage, you may need to reach out to another insurance company specifically for stand-alone gap insurance.
Here are some well-known insurance companies that provide gap insurance:
- State Farm
- Travelers
- Nationwide
- Auto-Owners Insurance
- American Family
- Liberty Mutual
- Safeco
- USAA
Additionally, there are insurers who offer gap insurance or similar products as part of a lease or auto loan package. State Farm, for example, offers gap insurance if you have direct financing through their bank, but note that you cannot obtain a regular auto policy through this method.
SEE ALSO: How To Save Money On Car Loan?
Other Options To Consider
In addition, there are other coverage options available for totaled or stolen vehicles. If you are unable to find gap insurance or it doesn’t seem suitable for your needs, consider exploring loan or lease payoff coverage or new car replacement coverages.
Loan or lease payoff insurance serves as an alternative to gap insurance and is often applicable to used cars. Unlike gap insurance that covers new vehicles exclusively, loan or lease payoff insurance pays a predetermined percentage, typically around 25 percent, of the vehicle’s actual cash value (ACV) in addition to the claim payout from your comprehensive or collision coverage.
If you owe more on your loan or lease than the car’s worth, ensure that the amount offered by this type of insurance is equal to or greater than the remaining balance after a claim.
Here are some well-known insurers that offer loan or lease payoff insurance:
- Esurance
- Farmers
- Progressive
If you prefer replacing your old vehicle with a new one instead of paying off the existing loan, new car replacement insurance is a suitable choice.
It covers some or all of the expenses involved in replacing the totaled or stolen car with a new vehicle of the same make, model, and year. Similar to gap insurance, new car replacement coverage is typically available for new cars only.
Here are some major insurance companies providing new car replacement insurance:
- Travelers
- Allstate
- Safeco
- Liberty Mutual
- Farmers
- Shelter Insurance
You can obtain quotes for gap insurance as a standalone policy or inquire about rates for gap insurance as part of a comprehensive coverage policy.
While many insurers offer gap insurance along with their standard auto policies, not all do. Therefore, it is advisable to shop around and find the right insurance with suitable coverage and pricing for your specific needs. Start exploring your options today!