Also known as loan/lease gap coverage, this optional insurance aids the insured driver in paying off the auto loan of the car in the event it is stolen or totaled. The car’s depreciated value must be less than what you owe. You are only able to receive this insurance if you are the original leaseholder for the vehicle. The way it works is the gap insurance covers the difference between the value of the car and what you still owe. Car insurance with gap coverage is optional but recommended if you are leasing your car.
Do I Really Need Gap Coverage?
If you are wondering whether or not you actually need gap insurance, answer this question. Are you financing or leasing a new car? If you answered yes, then you probably need it. You are required by many lenders to have comprehensive and collision coverage in your insurance policy, at the least till the car is paid off.
Collision coverage and gap coverage should be combined in your policy to protect your automobile completely. With comprehensive or collision coverage, the value of your car is paid back to you up to the amount of the depreciated value. The value of a brand new vehicle is instantly decreased when you drive it off the lot. Also, within the first year of the car’s ownership, the value of the car decreases by almost 20%. However, gap insurance comes into play when the totaled car’s value is less than what is owed.
Gap Insurance: How it Works
As an example: If you buy a car for $24,000, and you owe $19,000 on it, still when the collision takes place, you may still be covered. The collision coverage pays the lender the depreciated value of the car. If you still owe $19,000 and the car is only worth $17,000, you are stuck paying $2,000 out of pocket to settle the loan. However, in the event you have gap coverage, your insurer will pay the remaining $2,000 or close to it.
The above scenario suggests that the car is no longer drivable, and that is the only time the reimbursement would take place. If your car is totaled, and you feel you will need help to buy a new car, purchase new car replacement insurance. Many insurers will sell replacement coverage alongside gap coverage as a whole.
Is it Possible to get Gap Coverage After the Car is Bought?
Depending on the year of the vehicle, you are still able to get gap coverage after buying your car. You don’t have to be at the dealership to buy gap insurance. There are several insurers that will offer it in your insurance policy. Also, you may save money by buying gap insurance directly from a company rather than at the dealership.
There are some insurance companies that require your vehicle to be new in order for the gap insurance to be purchased. This could mean:
- That the original owner of the automobile is you. Either you have the original lease/loan on the vehicle.
- The model years are no older than 3 years. Make sure to check with your insurance company for the specific qualifications of the gap insurance option.
Is It Worth Buying?
When considering whether or not you want to purchase gap coverage, make sure to keep in mind that you may only be able to buy it for a brand new car that you are financing/leasing. Make sure you consider the value of the car compared to what you owe. If you want to check what your car is valued at, you are able to check out sites like Kelley Blue Book. If you owe more than the car is actually worth, ask your self if you can pay the difference of the price out of your own pocket in the event that it is totaled.
The following situations will help you decide whether or not you should consider gap coverage:
- If the down payment on the vehicle was less than 20%.
- If your auto loan period is 60 months or longer.
- You are leasing a new vehicle.
Lease contracts typically include gap coverage. Make sure to check your contract to see if you are covered.
When Does Gap Insurance Apply?
If you are underwater on the loan for your car, meaning if you owe more than the value, gap insurance applies in the event of it being totaled or stolen. The definition of ‘totaled’ in this situation is that the costs of repairs exceed the vehicle’s value. State laws and the insurer’s discretion determine whether or not a car is declared totaled. Car insurance with gap coverage could save you a lot of money out of pocket, make sure you check your insurance policy and leasing contract to see if you have coverage.