Gap insurance covers the difference between the value of a car at the time it’s totaled or stolen and what you owe on the vehicle. If you’ve been shopping for a new car, you may be wondering: Is gap insurance worth it?
Car owners know all too well that their new vehicle loses value the minute they drive it off the lot. A commonly cited statistic is that a new car immediately depreciates by about 11% as soon as you buy it and around 20% a year after that.
The problem is that standard auto insurance pays only what a car is worth at the time of a theft or accident in which it’s totaled. But you may owe more on your car loan or lease than the vehicle’s value. That’s where gap insurance comes to the rescue.
How gap insurance works
Gap insurance covers the unpaid loan or lease balance, supplementing the payout you get from comprehensive or collision coverage, or another driver’s liability coverage.
Some gap insurance plans will also cover your insurance deductible. That’s the amount subtracted from the payment for a comprehensive or collision claim. Other gap insurance plans could give you extra money toward a new car or even cover the gap between the insurance payout and the cost of a new car. Instead of gap coverage, some insurers offer auto loan/lease protection, which pays a set percentage of your car’s value, often around 25%, on top of the regular insurance check, according to insurer Esurance.
Do you need gap insurance?
Not everyone needs gap insurance, and those who do, need it only for a few years. Gap insurance may be worth it if you:
- Made only a small down payment on a new car (or none at all).
- Agreed to a long loan term (think: more than 48 months).
- Drive a lot, which reduces a car’s value more quickly.
- Lease your car (many leasing contracts include gap coverage automatically).
Who offers gap insurance?
There are two main ways to buy gap insurance:
- In a one-time fee through the dealership or lender (a fee that can often be rolled into your loan payments).
- From your auto insurer, as part of your regular insurance payment.
Lenders generally charge $500 to $700 for gap insurance, according to United Policyholders, a nonprofit consumer group. The Credit Union National Association, a trade group, says its members typically charge $250 to $300. If you add the coverage to your loan, you’ll also pay interest on it. Buyers who finance their car through State Farm Bank automatically get the company’s Payoff Protector service, which cancels the difference between the insurance payout and the loan balance.
Auto insurers typically charge around $20 a year for gap insurance, according to the Insurance Information Institute, a trade group. It’s generally added to comprehensive and collision coverage, so you’ll have to purchase that as well.
Adding gap coverage to an auto insurance policy is the best buy for most people, because they typically need it just for a few years. Not all car insurance companies provide gap insurance or an equivalent, or offer it in all states.
There also are some differences in company offerings. Esurance and Progressive, for instance, offer loan/lease coverage, which pays a set percentage of a car’s value, often around 25%. Allstate’s gap insurance covers deductibles up to $1,000.
Given its low cost, particularly if you buy it through your auto insurance company, gap insurance can be worth it if you have a lease or large car loan. Just remember to look in to canceling it as you pay down your loan balance.
While you’re weighing gap insurance, consider shopping around for car insurance quotes.
Updated July 24, 2015.