Personal Finance

Why Is Gap Car Insurance Important?

If you have taken out an auto loan or lease before, you may have been recommended gap insurance. Gap insurance, or gap coverage as it is called sometimes, is essentially a debt termination agreement you purchase to cover the cost of totaling a loaned or leased car. Sometimes accidents happen, and sometimes they are particularly bad. If you total a car, there is no way to repair it, and if you have collision insurance on your policy your insurance company reimburses you for the cost of the car. The amount you are reimbursed however is the value of the car at the time of the accident. When you lease or loan, you are paying for the value of the car when you first get it. It is highly likely your car would have depreciated, or lost value, significantly by the time you total it. The difference between the value of the car when you bought it, and the value at the crash is the 'gap', and gap insurance pays for it.

Should You Get Gap Insurance?

Not everyone needs or should have gap insurance. If you completely own the car you drive, there is no need for gap insurance. Only those who finance or lease their car should have gap insurance, and even amongst those drivers, only a certain few should buy gap insurance. Gap insurance is meant for drivers who take out a loan that is close to the value of the entire car, take out a long loan/lease, do not put any downpayment and/or your car is worth a lot of money. If one or more of those conditions apply to you, you should strongly consider gap insurance. The reason being, all of those profiles make it likely for a driver to be 'upside down' on their car payments.

To be 'upside down' on a car payment means you currently owe more than what the car is actually worth. That may seem counterintuitive, after all, how can a loan or lease become worth more than the car? The answer is depreciation. New cars can lose as much as 30% of their value in the first year. If you have a five year loan on the other hand, you likely would have only paid off less than 20% of it within a year. Simply, your car loses value faster than you can pay back your lease or loan. As time goes on that gap widens. Drivers with a large loan close to the value of car make it more likely to be upside down. As well, if you take a long loan, your monthly payments tend to be smaller, meaning you are paying back your loan slower.

To determine whether you will be upside down on your loan, you need to use an online calculator to figure out what your balance will be at all points of your loan. The next thing to do is figure out how much your car will depreciate by visiting websites like or If it turns out within 6 months your balance will be worth more than your loan, you should get gap insurance right away. Essentially, if in the next 5 years, you will be upside down more times than not, you should get gap insurance.

How Much Does Gap Insurance Cost and Where Should You Buy It?

The two questions are dependent on each other. Whenever you finance or lease a car, the first people to recommend gap insurance will be your dealership. Generally, you should not buy your dealership's gap policy. They are usually highly marked up, and could cost you hundreds of dollars per year. The cheapest policies come from your own car insurance company. Buying gap insurance from an auto insurance company usually costs less than $100 per year. The price is usually worth it for drivers who will be upside down on their loan. Better to be safe and pay $80 per year, than risk it and end up owing thousands of dollars to your financer or leaser.

Unfortunately, not every company has gap coverage. GEICO, the country's second largest car insurer, does not offer gap coverage for example. The companies that do offer the policy also make some stipulations as well. Progressive and Esurance both offer gap insurance, but will only cover 25% of the value of your car. So for example, if your car worth $25,000 is totaled, and the gap is $7,000, Progressive and Esurance would only pay $6,250 leaving you to foot $750 by yourself. State Farm has a gap coverage, but is only available to those who take their auto loan directly from State Farm. If you currently do not have an auto policy and want to loan or lease a car, you should shop around for the least expensive car insurance and consider going with one of the companies that offers that coverage to save money on the more pricey dealership package.

The article Why Is Gap Car Insurance is Important? originally appeared on ValuePenguin.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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