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Do You Need Gap Insurance For Your Car?

When you buy a car with a loan from a car dealer, they may try to convince you to buy gap insurance. The promise of gap insurance is that it will compensate you if your car is cashed in or stolen and you owe more on the loan than the car was entitled to.

You may wonder if gap insurance is worth the additional cost. Gap insurance can compensate you in certain circumstances. However, buying it is not always a good idea.

How does Gap work?

Insurers may call gap insurance something else, such as loan / rental insurance. Regardless of what you call it, this is how it works in most cases:

  • Gap insurance covers a car that you own or rent.
  • If your vehicle is picked up or stolen, you will file a claim for comprehensive or collision insurance, depending on the cause. For the total or stolen vehicle, insurance will pay the value of the car at the time of the accident, less any deductions.
  • If you owe more on the loan / rental than your total car insurance payments, gap insurance pays the difference.

If you don't have gap insurance and your loan or rental balance is greater than the value of the car, you will have to pay the difference yourself.

Some gap insurance companies can cover you for the entire loan balance, including any negative equity included in the loan from a previous auto loan. Others may not.

Although the consumer pays for the gap insurance, it also helps auto lenders and rental companies. Having gap insurance makes it less likely that you will give up your car loan or lease if the car is destroyed or stolen.

For this reason, the rental company may require you to have gap insurance when you rent a car.

Should I buy GAP insurance?

Gap insurance can be helpful in the following situations, according to the Insurance Information Institute:

  • I have rented a car.
  • You have transferred the negative principal from the last car loan to the new car loan (make sure you have a policy that covers the negative principal).
  • I bought a car that depreciates faster than other vehicles.
  • You have made a small down payment on your car of less than 20%.
  • You have had a car loan for five years or more.

You can assess your situation by comparing the current value of your car on a site like NADAguides to your car loan balance. The difference is the gap.

Once the value of your loan is less than what you still owe, there is no reason to keep gap insurance because there will be no insurance payment possible. Or, if you're selling the car, you'll need to drive the gap.

Vehicle depreciation can influence your insurance decision

If you buy a car that depreciates quickly, insuring the gap is a better bet. Average vehicle value drops about 49% after five years, according to a 2020 iSeeCars study that analyzed sales of more than 8.2 million vehicles.

Often times, the value of certain types of cars, such as luxury cars, depreciates at a much faster rate. The value of the BMW 7 Series declined over five years, losing nearly 73% in value, while the BMW 5 Series fared no better, as its value decreased by 70% over the same time period.

"Expensive luxury cars like the BMW 7 Series are falling dramatically because they have very expensive features and technology that are undervalued among used car buyers," iSeeCars executive analyst Karl Brauer said in a statement. He added that luxury cars are often rented, which can create a surplus of vintage cars, reducing their market value.

Even if you bought a car that is valued relatively well, you are still seeing a significant drop in value within the first five years of your car on the road. The Jeep Wrangler Unlimited posted the lowest average depreciation in five years at nearly 31%, which translates to an average loss in value of $ 12,168 after five years.

Bottom line: If you get a large loan to buy your car, gap insurance can save you a severe financial hit if your car is assembled, especially if you bought a luxury car.


Who sells gap insurance?

Gap insurance is generally sold by car dealers, banks, credit unions, and auto insurance companies. Insurance companies like Allstate, American Family, Nationwide, and Progressive sell gap insurance. Others, like Geico, don't sell gap insurance. Check with your auto insurance company to see if they offer gap coverage.

Gap Direct offers separate policies.

How much damage is done to the total car?

Gap insurance begins when your vehicle is assembled, but the definition of a "gross" vehicle varies from state to state. Many states set a percentage of the vehicle's value as a threshold, and the vehicle is considered included if repairs exceed that percentage.

Some states limit the use of NADAguides to research the value of a vehicle. Some states only specify that vehicle values ​​must come from the current version of the nationally recognized set of values, including databases. "Repair costs" include both parts and labor.

Other countries use the "Total Loss Formula" (TLF). For example, in California, the TLF is the cost of repairs + salvage value - the actual dollar value. If the sum of the first two amounts exceeds the actual dollar value, the vehicle is considered a total loss. In other states, TLF says the insurance company can decide if the car is a total loss.

How much does gap insurance cost?

The cost of gap insurance depends largely on where you buy it. Gap insurance can cost between $ 400 and $ 900 if you buy it through a car dealer or bank and add it to your car loan, according to Tricor Insurance.

If you bought gap insurance from your auto insurance company, the cost can range from 5% to 7% for your collision and a fixed premium. That is often $ 15 to $ 42 a year, according to Tricor.

What gap insurance does not cover

Some people mistakenly believe that gap insurance covers them in case they owe more than the car's worth and want to trade in the car for a new one. This gap insurance does not cover this.

Some policies limit the gap coverage as a percentage of your vehicle's value. For example, Progessive's gap insurance policy will pay a gap of up to 25% of the value of the car.

Read your document to make sure you understand exactly how much coverage you have and when to start.