What is GAP Insurance?
GAP insurance stands for “guaranteed asset protection.” However, an easier way to define GAP coverage is that is fills the “gap” between how much you currently owe on your car and how much an insurer would pay out if it got totaled in an accident. The total amount your insurance company would cover is known as the vehicle’s “actual cash value” (ACV).
How GAP Insurance Works
If you leased your vehicle or made a small down payment, there’s a high probability you owe more on the car than it’s currently worth. This is because cars start depreciating the moment you drive them off the lot — and they depreciate fast. In fact, the Insurance Information Institute (III) notes that cars can depreciate as much as 20% within the first year.
Let’s say you spent $35,000 on a car. A short while later it’s totaled in an accident, and your insurer deems the car has depreciated in value to $30,000. That’s the maximum you insurer will pay on a claim.
Depending on the size of your monthly payment, you could still owe the majority of the remaining $5,000 to your lender, all for a car you can no longer use. GAP insurance guarantees that, after your deductible, anything you had to pay toward that $5,000 would be covered by your insurer.
Is GAP Insurance Worth It?
When deciding whether or not you need GAP insurance, it’s important to consider how much you will owe in the event of an accident versus the expected depreciation of your car. There are a few scenarios where GAP insurance is particularly important:
- Small down payment on your lease or loan: Since cars depreciate quickly, if you make a small down payment on your lease or loan, it’s unlikely your monthly payments match the rate of depreciation.
- Long loan term: If you chose a loan term of 60 months or more in order to keep monthly payments low, it’s unlikely that what you’ve paid on the car will match the rate of depreciation.
- Putting a lot of miles on quickly: A vehicle’s rate of depreciation depends on its age and mileage, among other things. If you put a lot of miles on quickly, your car will depreciate faster.
- Bought a car that depreciates faster: Some cars depreciate faster than others depending on factors like style and popularity. According to Autotrader, the BMW 5 Series and Volkswagen Passat are two of the fastest depreciating cars on the market right now.
- Couldn’t easily cover the gap out of pocket: The gap between what you owe and what your car is worth can often be thousands of dollars. If you wouldn’t be comfortable footing that bill on your own, GAP insurance might be a good idea.
How Do I Get GAP Insurance?
You can either get GAP coverage through your insurance company or from the dealership where you bought the vehicle. The right method for you depends on cost and payment preference. Most dealerships charge a one-time fee, which can often be rolled into your loan.
Insurance companies typically offer GAP coverage as an add-on to comprehensive and collision insurance, with a small upcharge on your monthly premium.
GAP coverage through your car insurance company is often cheaper than through the dealership, according to the Insurance Information Institute. However, rates are individual, and its important to compare prices to find the cheapest option for you.
How Much Does GAP Insurance Cost?
GAP insurance is generally pretty affordable. According to the Insurance Information Institute, including GAP insurance with collision and comprehensive coverage will only add about $20 dollars to a driver’s annual premium on average.
In addition, if your car insurance company does not offer GAP insurance, it may offer something known as “loan/lease coverage”, which typically costs less than adding GAP insurance to your current policy. Loan/lease insurance covers a set percentage of your car’s actual cash value, which may or may not be enough to cover the gap between what you owe and what your car is worth.
GAP Insurance Companies
Ideally, since accidents can happen at any time, you’ll want to get GAP insurance as soon as you’re ready to take your car off the lot. The easiest option will likely be to add this coverage onto your existing auto insurance. Below are a few of the most popular auto insurance companies that offer GAP insurance as an add-on for personal auto insurance:
- State Farm
- Liberty Mutual