GAP Insurance: What It Is and How to Get It

GAP insurance covers the difference between what you owe on a vehicle and what your insurer says it is worth when you suffer a total loss. It is a special protection that supplements liability, comprehensive, and collision coverage, ensuring that you are not left paying the loan deficiency.

If you’re wondering what GAP insurance is, read on to learn more about what GAP insurance covers and how to get it.

How much is GAP insurance typically?

GAP coverage costs about 6% of your combined collision and comprehensive insurance, or approximately $5 per month. Your insurer will, however, look at a few other matters before offering a quote. These include the actual cash value (ACV) of the vehicle, where you live, and previous insurance claims.

Your dealer may also offer GAP coverage for a flat fee, usually between $500 to $700. However, this means working with a third party to settle your claim instead of your usual insurer.

Furthermore, you may only need GAP coverage for a few years or until the outstanding loan balance drops beneath what the vehicle is worth. In that case, paying for the coverage as you need it may save you money in the long run.

Which companies provide GAP insurance?

GAP coverage is offered by many auto insurance companies. Although it’s not part of the full coverage car insurance new vehicle owners usually seek, it is usually readily available. And if you lease a vehicle, lease GAP insurance is often included within the lease agreement.

Insurers offering GAP insurance include:

• Progressive
• Liberty Mutual
• Allstate
• Travelers
• Nationwide
• American Family

While some insurers don’t expressly offer GAP coverage, some supply payoff protection as part of their standard insurance. Ensure that whatever coverage you have offers sufficient protection to pay the difference between the insurer’s settlement and the outstanding balance on your loan.

Can I get GAP insurance by itself?

You can buy gap insurance coverage on its own or you can obtain it from your insurance company. Generally, you’ll get the best value with your insurer as they will bundle it with all your other coverages, including liability, collision, and comprehensive.

It’s also convenient to keep all your coverage together when it comes time to file a claim. Holding separate policies may slow the process and require you to continue to make loan payments until your case is closed.

How can GAP insurance help you save money on car repairs?

GAP coverage does not extend to car repairs. Instead, consumers should rely on their auto insurance claim settlement to cover those costs.

GAP only kicks in when a vehicle is totaled, which means repair costs are moot. Even if you’re able to obtain the salvaged vehicle, any repairs would not be covered.

Is GAP insurance worth it on a new car?

In many cases, choosing car GAP insurance is a solid decision as it covers the negative equity caused by not putting enough money down on a vehicle or choosing a loan longer than 60 months.

If your loan is shorter than 48 months, you are not likely to need GAP coverage. You also don’t need GAP insurance if you pay for your car in full or put a significant amount down.

However, it could prove beneficial to get GAP insurance if you purchased a new vehicle with a small down payment, a long-term loan, or a high interest rate. In this case, the vehicle’s actual cash value (as determined by the insurer) could quickly become less than what you owe on the loan.

Getting GAP Coverage

GAP insurance is the coverage you need when your vehicle is new or leased and your loan balance is high. It can save you a bundle of cash if your vehicle is totaled. The monthly cost rivals what you pay for just one large caramel Frappuccino, so it’s often worth the peace of mind.

Case Studies: Real-Life Examples of GAP Insurance in Action

Case Study 1: John’s New Car

John recently purchased a brand-new car worth $30,000 with a loan term of 60 months. He put in a small down payment of $2,000 and opted for a high-interest rate due to his credit score. A few months later, John is involved in a severe accident, and his car is deemed a total loss. His insurance company determines the actual cash value of the car to be $24,000.

However, John still owes $27,000 on his car loan. Without GAP insurance, John would be responsible for paying the $3,000 difference out of pocket. Fortunately, John had opted for GAP insurance when he bought the car. His GAP insurance coverage kicks in and covers the remaining loan balance, saving him from a significant financial burden.

Case Study 2: Sarah’s Leased Vehicle

Sarah decided to lease a new vehicle for three years. The car’s value at the start of the lease was $25,000, and Sarah agreed to monthly lease payments based on the vehicle’s depreciation over the lease term. Unfortunately, just a year into the lease, Sarah’s car is stolen and never recovered. Her insurance company determines the actual cash value of the car to be $18,000.

Since Sarah is responsible for the remaining lease payments, she would normally be liable for the $7,000 difference between the car’s value and the lease balance. However, Sarah had included GAP insurance in her lease agreement. The GAP insurance covers the outstanding balance, relieving Sarah of the financial obligation.

Case Study 3: Mark’s Upside-Down Loan

Mark bought a used car worth $15,000 with a loan term of 72 months. He didn’t make a down payment and opted for a longer loan term to keep his monthly payments affordable. Unfortunately, a year later, Mark is in an accident, and his car is declared a total loss. The insurance company determines the actual cash value of the car to be $11,000.

However, Mark still owes $13,000 on his loan. Without GAP insurance, Mark would have to pay the $2,000 difference himself. Luckily, Mark had purchased GAP insurance when he bought the car. The GAP coverage steps in and covers the remaining loan balance, preventing Mark from being financially burdened by the difference.