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If you’re like 107 million other Americans, you probably have an auto loan. With new cars often costing tens of thousands of dollars, it’s the best way for most people to afford a car. This is especially true if you’re driving for a rideshare company, which generally require newer cars for use in their services.
For most people, a car is a way to get to work, run errands, and transport family members. As a rideshare driver, however, it’s more than just that. It’s also the way you earn money. It could be just some supplementary income you earn driving a few hours a week before and after work, or it could be your full-time job.
Regardless, losing your car could be very problematic, especially if it’s something you rely on for your income and one for which you’ve taken out a loan. If your car is totaled while you still owe money on it, you could end up having to pay a hefty sum to your lender. To help avoid this potentially ruinous financial situation, insurance companies offer what’s called “gap insurance.”
In this article, we’re going to take a look at the gap insurance that the Allstate insurance company offers. We’ll examine what gap insurance is, why you should consider it, and if it’s worth it for you as a rideshare driver.
To start, let’s be clear about what gap insurance is not. While some people use the terms interchangeably, gap insurance is not the same thing as rideshare insurance. The reason for the confusion comes from some of the terminology that rideshare insurance policies use.
When you’re driving for a rideshare company, you have the potential to experience what’s called the “coverage gap.” This is the period of time when you’re in your car with the Lyft or Uber app on but haven’t yet accepted a passenger.
During this time, your auto insurance company considers you to be “working,” so your personal policy won’t cover you. On the other hand, since you’re not giving a ride to a passenger, the rideshare company won’t cover you under their policy. This can lead to the potential for astronomical bills that you’ll have to pay out of pocket if you’re involved in an accident during the coverage gap.
To help you avoid this problem, many insurance companies now offer special rideshare insurance policies for the purpose of gap coverage. These policies protect you during that window of time when you’re “on the clock” but not transporting passengers. To learn more about rideshare insurance, check out our definitive guide to rideshare insurance. If you’re not convinced you need it, then read this post.
The similarity in terminology between “coverage gap” and “gap insurance” makes it easy to confuse the two. But they’re not the same. Gap insurance, as we mentioned in the introduction, is a separate insurance product that helps protect you when your car is totaled.
To understand gap insurance, you need to understand the two types of insurance coverage that it supplements. These are collision coverage and comprehensive coverage.
- Collision coverage is a type of car insurance that helps pay to repair or replace your car if it’s damaged or totaled in a collision with another vehicle or object.
- Comprehensive coverage is similar to collision coverage, except that it covers situations in which your car is damaged or totaled due to factors not involving a collision (such as a fire, vandalism, or falling objects).
Most auto lenders require you to carry both of the above types of insurance on a car that you’re financing. This is in addition to the state-required minimum liability coverage, which all drivers need to have regardless of whether or not they’re financing their cars.
So where does gap insurance come into this equation? The key thing about collision and comprehensive coverage is that they will only pay for the value of your car up to its depreciated value, not the value it had when you bought it new. New vehicles depreciate the minute you drive them off the car lot. Your auto loan, however, is still for the full new price of the vehicle.
What can potentially happen, then, is that you’ll owe more on your car loan than the car’s actual cash value. If this is the case when your car is totaled, you could have to make up the excess amount out of pocket in order to pay off your car loan. This is sometimes known as being “upside down” on the loan.
This is where gap insurance coverage can help you out. A gap insurance policy would pay the difference between the amount you owe on your car loan and the (depreciated) value of the vehicle, helping you pay back the lender without any out-of-pocket costs.
Let’s put some numbers to this for an example. Let’s say you bought a car for $25k. You currently owe $20k on it, but its depreciated value is only $19k. A tree falls and hits your car, damaging it beyond repair. Your comprehensive insurance coverage kicks in, but it only pays the $19k that your car is worth. You still owe your lender $1k, which you’d have to pay out of pocket…unless you have gap insurance. With a gap insurance policy in place, your insurance company would pay the extra $1k, saving you from a big financial sting.
How Much Does Allstate Gap Insurance Cost?
The precise cost of gap insurance depends on a variety of factors that affect the cost of your car insurance coverage overall, including your age, sex, state of residence, driving history, and the vehicle you buy.
Bankrate reports that, on average, adding gap insurance to your car insurance policy costs between 5 and 6 percent of your premium for comprehensive and collision insurance. This usually translates to a few extra dollars per month.
However, the only way to know what it will cost you is to get a car insurance quote. There are too many factors at play to make blanket statements about this insurance’s cost. For a gap insurance quote, go to allstate.com.
Now that you understand how gap insurance works, you’re probably wondering, “Is this right for my situation?” We think this depends on a few factors. This first is the size of your auto loan. If you’re only borrowing a small amount, then it might not be worth adding the gap coverage. You should also consider how much you have in savings. If you have a fair amount of money in your emergency fund, then you already have a form of “insurance” for a situation where your car is totaled.
And, of course, it’s worth looking at the depreciated value of your car. Some vehicles depreciate more quickly than others. According to a list from Edmunds, cars like Honda Civics and Toyota Corollas tend to hold their value pretty well over time. A Mercedes-Benz E-Class, on the other hand, can lose a staggering 34.5 percent of its value in just the first year of ownership, according to MSN.
If you’re buying a car that tends to hold its value well, then gap insurance probably isn’t worth it, since the difference between the car’s value and what you owe on the loan might only be a couple hundred dollars. To check your car’s value, you can consult a site such as Kelley Blue Book.
It’s also worth considering these recommendations from the Insurance Information Institute, who state that you should consider gap insurance if any of the following situations apply:
- You made less than a 20 percent down payment on your car
- The length of your auto loan term is longer than 60 months
- You’re leasing your vehicle (although, in some cases, lease contracts may include gap coverage)
Finally, you should know that gap insurance will not pay to replace your totaled vehicle. For that, you would need new car replacement coverage. This is a separate type of insurance, though it is sometimes possible to get a policy that includes both gap and new car replacement coverage.
Cover the Insurance Gap
We hope you now understand what gap insurance is, including how it differs from rideshare insurance. When you drive your vehicle as much as a rideshare driver does, it pays to be aware of all the insurance situations you could encounter, as well as the types of coverage that exist for each. We hope you never need to use any type of auto insurance, but it’s better to be safe than sorry.
Wishing you a safe drive!
Brett Helling is the owner of Ridester.com. He has been a rideshare driver since early 2012, having completed hundreds of trips for companies including Uber, Lyft, and Postmates. In 2014 he acquired Ridester.com to share his experiences with other drivers. His insights are regularly quoted by publications such as Forbes, Vice, CNBC, and more. He is currently working on a book about working in the Gig Economy, expanding his skill set beyond the rideshare niche. Read more about Brett here.