Gap insurance Protection

Protection if a new ride gets wrecked.

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What Is Gap Insurance?

Gap insurance — also known as guaranteed auto protection insurance — covers the gap between what your car is worth (read: what your auto insurer will pay out if the car is totaled or stolen) and what you still owe on it. Gap insurance is important to consider because, as you’ve no doubt heard ad nauseum, a car depreciates in value the second you drive off the lot. For a more concrete stat, according to Fitch Ratings, the annual depreciation rate on two-to six-year-old vehicles was 17.3% in 2016.

What Does Gap Insurance Cover?

OK, say you buy a car for $30,000 and only put $1,500 down. Less than a year later, it gets totalled or stolen. You still owe $25,000 on the car, but — thanks, depreciation! — the car’s actual cash value (read: fair market value) at the time of the incident is $20,000, which is what your insurer will pay out on the claim. That puts you on the hook for the remaining $5,000 — unless you have gap insurance. Then the difference is covered. The same principle applies if you’re leasing. Remember, you may not own the car, but you’re responsible for it!

FYI, the above scenario assumes you don’t have a deductible for simplicity’s sake, but, in reality, you’ll probably have to pay something out-of-pocket. Some gap insurance policies cover your deductible; some do not.

What Doesn’t Gap Insurance Cover?

Pretty much anything else. You can’t put gap insurance toward repairs, a down payment for a new vehicle or car payments if you’re unable to make them as a result of financial strain. Also, gap insurance doesn’t cover depreciation in general, so you can’t, say, use it to pay any carryover balances from car loan to car loan.

Gap insurance also doesn’t necessarily apply anytime a car is totalled. For starters, if you own the car outright or owe less than it’s worth, you can’t file a claim and just get that money. Plus, we’re talking insurance, so there might be exclusions. For instance, some policies won’t cover destruction via natural disaster. Be sure to ask upfront if there are any gaps in a potential gap insurance policy (tee-hee).

Do I Need Gap Insurance?

Yes, if you fall into one of the following buckets:

  1. You financed a brand spanking new car, but only put a small amount of money down, say less than 20% of the purchase price. In that case, you’ll probably owe more than what your car is worth in the event of a theft or wreck during the first few years of ownership.
  2. Your auto loan term is longer than 60 months, because your car payments are smaller and, thus, it’s going to take you longer to bypass the gap between what you owe and what your car is worth.
  3. You can’t cover the gap. Generally speaking, if you don’t have enough money in the bank to cover that difference, the extra insurance is in order.
  4. You’re leasing. In fact, there’s a good chance your leasing company will require you carry gap insurance to cover depreciation on the car. They usually don’t require you to purchase a standalone policy, though, and, instead will roll the cost into your lease payments.
  5. You drive more than 15,000 miles a year, because all that time on the road makes a car lose value that much more quickly.
  6. Your car depreciates faster than others — and not because you’re driving all over town. Some cars just hold up better than others. You can research resale or retained car values online, but as a starting point, a 2016 study from iSeeCars.com found luxury brands (read: expensive) cars generally depreciate faster, at least in their early years.
  7. Your car is a favorite among thieves. The National Insurance Crime Bureau puts the Honda Accord, Honda Civic, Ford Pickup, Chevrolet Pickup and Toyota Camry among the most stolen cars of 2016.

What Does Gap Insurance Cost?

OK, pay attention, because this is important: Gap insurance can cost anywhere from $20 to $1,000 a year. What’s with the big range? Well, gap insurance is a popular add-on at dealerships and, if you buy a policy from one, you’re probably going to pay handsomely for that convenience. (It gets rolled into the loan, so the coverage actually accrues interest — that’s why gap insurance tends to cost more when you lease, too.)

As such, you’re better off buying gap insurance from an actual auto insurer. We can help you compare car insurance quotes here. Most tack on about 5% to your total comprehensive and collision coverage. In fact, according to the Insurance Information Institute, under most standard auto policies, gap insurance with collision and comprehensive coverage adds about $20 to a yearly premium.

Got more car insurance questions? Visit our Auto Insurance FAQ.

Last updated on Oct 5th 2017