Gap insurance is auto insurance that car owners purchase to protect themselves against losses in car value. This comes into play when the amount of compensation received from a total loss does not fully cover the amount that the insured owes on the vehicle’s financing or lease agreement. It pays the difference between what you owe on your car and what it’s worth at the time of an accident. It is an important coverage to consider for those who owe more on their car than its current market value.
What is Guaranteed Auto Protection( GAP) insurance on a car?
Gap insurance is an optional coverage. It pays the difference between what your vehicle is worth and how much you owe on your car at the time it’s stolen or totaled. So this coverage supplements a comprehensive or collision car insurance payout, which can only be as high as your car’s value.
For example, if you owe $20,000 on your car loan but your car is only worth $15,000 at the time of an accident. Then it would cover the $5,000 difference between what you owe and what your car is worth.
How much is gap insurance cost?
Gap insurance is usually an inexpensive coverage. For example, according to Forbes Advisor’s analysis of costs from large companies, it adds an average of $65 a year to your car insurance cost. However, the cost can vary depending on the insurer and the state you live in.
Is it worth the cost?
Gap insurance is worth it if you owe more on your car loan or lease than your car’s value. It bridges the difference between your payout and your loan balance. Therefore it can help you avoid paying out of pocket if your car is totaled or stolen. That is to say, the cost of it is low if you buy it from your comprehensive provider. You should shop around for the best on cheap car insurance companies deals and compare alternative products.
Gap insurance on a new car is worth it only as long as you are leasing a car or if you owe more on a loan than your car is worth. You don’t need it if you don’t have a car loan or lease.
Do I need gap insurance if I have full coverage?
Yes, you need it if you have full coverage and still owe money on a car loan or lease. It is not mandatory as liability only car insurance. But you need it even if you have full coverage. Because full coverage does not cover the difference between what you owe on a loan/lease and the car’s actual cash value.
You don’t have to buy this insurance. But if you decide you want it, shop around. Lenders may set varying prices for this product1.
when does it not pay?
Gap insurance does not pay when a car needs normal repairs. Because of property damage car insurance pays normal damage. But when a car is damaged but not declared a total loss, or when a driver does not make the necessary payments. It only pays when the car is totaled and there is a difference between the lease or loan balance and the car’s value.
Different types
There are different types of gap insurance policies that you can choose from. Here are some of them:
- Back to invoice: This pays you the difference between what your car insurer will pay out in the event of your car being written off or stolen and the original amount you paid for it OR the amount you owe to a car finance company.
- Vehicle replacement: This pays the difference between your insurer’s payout and the cost of replacing your car with a new one.
- Contract hire: This covers the difference between what your insurer will pay out and what you owe on a contract hire agreement.
