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What is Gap Insurance and Why is it Important?

Many drivers understand the importance of having insurance to protect themselves in case of an accident. Comprehensive and collision insurance are key components of most insurance portfolios. However, you may be missing out on another important element that allows you to protect yourself financially.

According to the Insurance Information Institute, as soon as you drive a brand-new vehicle off the dealer lot, it begins to depreciate, or lose value. Some new cars depreciate up to 20% in the first year of ownership. Helping to fill that space is gap insurance. Use this guide to find out more about gap insurance and why it is important to many vehicle owners.

What does gap insurance do?

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Gap, or guaranteed auto protection, insurance helps defray the costs in an accident in which the driver has totaled or badly damaged a car. Some drivers may still be wondering, what does gap cover, though? Gap helps cover the difference between what the vehicle is presently worth and the amount actually owed, based on the amount of depreciation the vehicle has seen since it was purchased.

How does gap insurance work?

As an example of how gap insurance works, let's say you've recently purchased a brand-new car for $30,000. If your car gets totaled during a collision that is covered by your insurance and you still owe $25,000 on the loan, the collision coverage would pay the lender up to the car's depreciated value. If that value is $23,000, that would be the amount covered by your insurance policy.

If you did not have gap insurance, you would have to pay the difference out of your own pocket to close out the loan on the undrivable car - in this case, $2,000. Your loan would be considered "underwater" at this point, although that is not uncommon for many car owners. If you had gap insurance, the insurer would help cover the final $2,000 to close out the account.

Where to buy gap insurance?

You can purchase gap insurance at your credit union and can easily be added by most of the major insurance companies. Contact your provider or credit union and ask about adding gap insurance.. In many cases, the additional cost is reasonable.

Is gap insurance necessary?

While gap insurance is a handy protection plan to have in case of emergency, it may not be suited for all car purchases. In addition, it is rarely required to purchase a vehicle. If a dealer says you must have gap insurance, check with the lender to determine if that is the case. Consider gap insurance for your new vehicle if you:

  • Made less than a 20 percent down payment
  • Leased the vehicle
  • Bought a car that depreciates at a faster rate than the average vehicle
  • Financed a vehicle for 60 months or more
  • Rolled over negative equity from an old car into a new one

How do I know if I have gap insurance?

Check the paperwork from both your insurance agency and dealer. Look through your recent insurance policy bills to see if gap insurance coverage has been added to your account. If you feel like gap insurance may have been added at the time you bought the new vehicle, look through the terms or your loan to see if it is active.

Do I need gap insurance if I have full coverage?

Yes, because gap insurance is designed to work in partnership with comprehensive, or full, coverage. The gap insurance will kick in to cover the value of the car loan not covered by insurance in case of a serious accident.
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