What Is Gap Insurance And How Does It Work?

While most people don’t want to pay more for their insurance premiums every month gap insurance may be a good option for you depending on your current car loan situation.  If you are underwater on your car loan gap insurance can help protect your investment.

Gap insurance is optional insurance that is designed to cover the gap between how much owed on a vehicle and the actual vehicle’s value.  Gap insurance, in the event of a crash, will pay out the remaining “gap” in value between what your car is currently worth and how much you have left on your auto loan. 

The actual value of your vehicle will fluctuate based on how old the vehicle is and how many miles are on the vehicle.  This value may not always be equal with the amount of money that you currently owe on the car.  

How Does Gap Insurance Work?

If you get into a crash or someone hits your car gap insurance will cover the difference between what you owe on your loan and what the actual value of the car is.  Say for example you owe $20,000 on your car loan but your car may only be worth $15,000.

If you don’t have gap insurance and you get in a wreck your insurance company is only going to pay you what your vehicle is worth to replace your car.  In this case that would have been $15,000. But that still leaves you $5,000 short on how much you still owe for the car.

With gap insurance, the insurance company would cover the extra $5,000 amount that you would not have been paid out otherwise.  That way you would get enough money back to cover the full amount that you still owe on your auto loan.

Where Do You Buy Gap Insurance?

You can buy gap insurance from many common insurance providers such as Allstate, Geico, and Nationwide.  There may be specific requirements for signing up, make sure that you shop around and find the best gap insurance provider for your needs.  

Odds are your current car insurance company will offer gap insurance but like I said you would be better off shopping around and comparing rates across all car insurance providers.  That way you know you are getting the best deal on gap insurance for your car.

Do You Need Gap Insurance if You Have Full Coverage?

Full coverage insurance will only pay for the current value of your car if you get in an accident.  Full coverage will not pay for the current loan amount that you have outstanding. Gap insurance is typically not included in your insurance policy unless you specifically ask for that coverage.  Gap insurance is designed to reimburse you for the “gap” between what your car is currently worth and how much you have outstanding on your car loan.

How do you Know if You Have Gap Insurance?

You would want to check your current insurance policy to see if it includes gap insurance.  You could also call your local insurance agent to have them look over your policy to determine if gap insurance is currently included.  Most car insurance companies will offer gap insurance if you ask to have that coverage added to your current insurance policy.

Is Gap Insurance Worth the Money?

Gap insurance is worth the money if your car is worth significantly less than you currently owe on your vehicle.  If your vehicle is worth about the same as you currently owe on the car loan then you would be better off not getting gap insurance.  

Gap insurance is really designed to help out people that are significantly underwater on their car loans or have a car that has depreciated heavily since the purchase of the car. European luxury cars are known for depreciating heavily during the life of the vehicle and can lose thousands in their value just by driving the car off of the lot.

Another common reason for being underwater on a car loan is rolling a previous car loan balance into a new car loan.  Some people decide that they want a new car now and can’t wait to fully pay off their previous car loan before getting a new car.  For these people, their car loan is going to likely be significantly higher than the value of their current car.

Rolling a previous car loan into a new car loan and buying a luxury car is just a couple of the reasons why car loans keep getting larger every year.  If you’d like to learn more about why the average car payment keeps increasing then check out my other article that goes into more detail on the subject and explains why.

Is Gap Insurance Good to Have?

Gap insurance is good to have if your car is worth significantly less than how much you owe on the car loan.  If you don’t have gap insurance and you get in a wreck your car insurance company is going to pay you how much that vehicle is currently worth.  

If your car is only currently worth $5,000 but you owe $10,000 on your car loan then you are going to have to come up with $5,000 to pay off the car loan or roll that $5,000 into a new car loan.  Rolling a previous loan balance into a new loan is really only perpetuating the cycle of being underwater on car loans so I would only do that as a last resort.

What Are the Best Gap Insurance Companies?

If you have a favorite insurance company they likely offer gap insurance.  Companies like Allstate, Geico, and State Farm all offer gap insurance for current and new customers.  

What Does Gap Insurance Not Cover?

Gap insurance will only cover the gap between your loan balance and how much your car is currently worth.  Gap insurance will not pay for a rental car while your car is in the shop.

Gap insurance will also not pay for any repairs on your current car, those would typically be covered under collision insurance.  Gap insurance will also not cover any extended warranties that you have on your current car and will not pay for the down payment for a new car.

Do You Need Gap Insurance If You Have Full Coverage?

Gap insurance and full coverage insurance are not the same things.  Full coverage insurance will pay for repairs on your vehicle in the event that you are in a crash.  However full coverage insurance will only pay you what the current value of your car is.

If you bought your car for $50,000 dollars a few years ago it may only be worth $30,000 today.  It’s a good idea to look up the current value of your car before deciding to purchase gap insurance or just go with full coverage insurance.

Does Gap Insurance Give You Money For a New Car?

No, gap insurance will not give you money for a new car.  However, if you have full coverage insurance then you will get money for a new car in the event that you total your current car.  That is why it is important to understand the differences between insurance coverage and then determine what type of insurance coverage is right for you.