Gap Insurance: What It Is and Why You (Might) Need It

Purchasing a car can be a big investment. In fact, for many people, it’s the largest purchase they’ll make besides a home. The average new car in the United States costs over $30,000, according to a report from J.D. Power and LMC Automotive.

For this reason, most people will take out a loan to purchase their car. And these loans can get expensive. The average car payment for a new vehicle is $523 per month, and that doesn’t even include the other costs of car ownership such as gas, registration, taxes, maintenance, and insurance.

Insurance, in particular, can represent a significant additional expense, especially on new vehicles. This is because your lender wants to protect the collateral for your loan in case something were to happen to your car. In addition to the state minimum liability insurance, you’ll generally need to carry collision and comprehensive insurance on your vehicle until you’ve paid off the loan.

What happens, however, if your car gets totaled within the first few weeks, months, or even couple years that you’re financing it? You could end up in a bad situation, as your regular auto insurance policy will only cover the depreciated value of your car. This could lead to you owing more on your car than it’s worth (also known as “negative equity”).

Is there a way to protect yourself against this situation? There is. It’s called gap insurance, and in this article we’ll explain what it is, what it covers, what it costs, and whether or not it’s worth it. We’ll also give you a list of the auto insurance companies that currently offer gap insurance coverage so that you can start shopping for it today.

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What Is the Coverage Gap?

Gap Insurance: What It Is and Why You (Might) Need It

If you have car insurance, you might think you’re safe from the financial repercussions of the total loss of your vehicle. This could be true, but it might not be if you have a high loan on a new vehicle. The moment you drive that vehicle off the lot, it loses a substantial amount of its value to depreciation. According to Carfax, a car will lose 10 percent of its value after you take it out of the car lot, and it will lose another 10 percent within the first year. Over the first five years of its life, the average car will lose 60 percent of its total value.

In some cases, this might not be a problem. Sure, it’s frustrating to know that the car you just bought is going down in value, but you didn’t buy your car in the hopes that it would appreciate. You bought it to get you around town, to run errands, and maybe even to help you earn extra money as a rideshare or delivery driver. Why does it matter if it depreciates?

This rapid depreciation can hurt you if you total your car while you still owe a lot of money on it. Remember, your auto lender doesn’t care about the car’s depreciation. They made their money lending you the price you paid for the car (minus any down payment you made, of course).

Taking the average depreciation numbers from Carfax, let’s give an example of what can happen. If you buy a new car for $30,000 with $1,000 down (a common enough situation), then you’ll have to take out a loan for $29,000.

Once you drive the car off the lot, though, its value decreases to $27,000. In the worst case scenario, if you were to wreck that car during the first month you own it (maybe even before you’ve made any payments on it), you could be stuck with a car that’s worth $27,000 on which you owe $29,000. This is called being upside down on your loan.

But wait. Won’t your insurance policy step in and protect you, reimbursing you for the value of your car? They’ll certainly be able to help pay off the loan, but they probably won’t cover the full loan amount.

Rather, insurance covers the actual cash value of your car, not the loan amount. So you could end up owing thousands of dollars to your lender for something on which they no longer have collateral. Never mind that fact that you’ll then have to look for a new car and likely finance that, putting yourself in further financial trouble.

Gap insurance exists to protect you in a situation like the one above. If you have gap coverage, then your insurance company will pay the difference between your vehicle’s depreciated value and your auto loan amount. This can save you a lot of financial and emotional strife.

How Much Does Gap Insurance Cost?

As with any insurance product, the precise costs depend on your specific situation, with factors such as your age, sex, driving history, state of residence, and vehicle all playing a role. That being said, we can look at the average costs of gap insurance across insurers to give you an estimate of what you’ll pay for gap insurance coverage.

According to the Insurance Information Institute, adding gap insurance coverage to your personal auto policy can be quite cheap, costing only an extra $20 per year on average. Of course, this number is just an estimate. Your costs can vary dramatically, especially if you have a history of automotive accidents in which you were at fault (which therefore makes you a higher risk for future accidents in the eyes of the insurance company). It’s almost always a better deal to buy gap insurance as part of your auto insurance policy instead of buying it from your car dealer (assuming you’re financing through them).

Dealerships can charge a flat fee of $500–$700 for gap insurance, making themselves a hefty profit while increasing your car buying costs. If you have a choice, then buy your gap insurance from your insurance company.

Is Gap Insurance Worth it?

Even though gap insurance can be cheap, it may not make sense to get it. It only makes sense if you’re going to be in a situation where you could conceivably end up owing more on your car loan than your vehicle is worth.

This generally happens in situations where you put a small amount of money down on your auto purchase. It can also happen if you’re leasing your vehicle, which is why many lease contracts will require you to carry gap insurance (which you may have to purchase from the lender or buy from your insurance company, depending on the contract’s stipulations).

If you’re buying a used vehicle that’s already lost a lot of its value, then gap insurance probably isn’t necessary. It also isn’t necessary if you’re making a large down payment on the vehicle and will already have a healthy amount of equity in it before you’ve started making payments. To see your vehicle’s current value (or estimate its depreciated value) you can consult a resource such as Kelley Blue Book.

Who Offers Gap Insurance?

A variety of insurance companies offer gap coverage. You can get it from the following major insurance companies as part of your car insurance policy:

The specifics of each company’s coverage vary, and your situation will have a large effect on the coverage you receive. An insurance agent can help you get a quote for gap insurance, as well as other types of auto coverage you might need. If you already have car insurance, then talk to your current agent about how you can add gap coverage to your existing policy.

Why Gap Insurance Matters for Rideshare and Courier Drivers

Driving for Uber, Lyft, or a delivery company can be a great way to put your car to work earning extra money outside of your regular job hours. Or, you might even pick up enough hours driving for one or several of these companies that you can replace your full-time income.

When you drive for a ridesharing or delivery company, you’re putting your car out on the road more hours per day than the average person. This increased time on the road means more times that you could get involved in an accident that could lead to the total loss of your vehicle.

Therefore, having gap insurance could make more sense for you than the average person who just uses their car to commute and run errands. This might not apply if you have an older vehicle or a small auto loan, but it’s worth keeping in mind the extra risks you run into when using your car to earn more money. Gap insurance could be the thing you need to secure yourself against a ruinous financial situation.

Get the Gap Coverage You Need

We hope you now understand what gap insurance is, as well as how it can be beneficial to your situation. Not everyone will need this type of coverage, but it can be a relief to have it when you do need it.

Note: This article is for informational purposes only. For professional insurance advice and specific quotes, you should speak to an insurance agent or broker. They can help you navigate the different policies available for your unique situation.