Dealing with insurance companies is never fun especially car insurance companies. There’s a lot of red tape and fine print to navigate before you finally get a payout on your claim. Often, what you get isn’t what you expected, and you’re stuck paying the rest out of pocket.
That’s where GAP insurance comes into play. It helps cover the gap left between what you owe on a car and what the insurance company is obligated to payout, according to your insurance coverage.
But is it necessary?
In today’s world, we’re regularly being sold upgrades to products and services, many of which we don’t need. Is this another example of a meaningless additional cost? Or is it a necessary insurance policy boost that can help you out of a tough time?
Read on to find out.
What is GAP Insurance?
Before we go into whether or not GAP insurance is truly necessary, we should first touch on what it is. That will give you a better understanding before you make a decision.
In the event of a total loss, GAP Insurance covers the gap between what your insurance company will pay out and the amount of money you owe on the car loan.
Why would you need this?
When financing a car, it’s unlikely that your vehicle’s value will be greater than the amount of financing over the life of the loan. Accidents happen, sometimes severe ones.
Let’s say you’re involved in a significant crash that ends with the car completely totaled. It’s likely you will get less from the insurance company than you still owe on the original car loan.
While the insurance plan is meant to help you in the event of a significant accident, it won’t cover the total cost of the loan. You will end up still owing quite a lot of money. Unless you have gap coverage!
Let’s say you have a six-year loan for $18,000 on a vehicle. You get into an accident a few years into the loan period when you still owe $10,000. Insurance is only paying you $4,000 based on the depreciating value of the car. You’re still on the line for that $6,000.
GAP insurance would pay out the remaining $6,000 for the loan. That means you can rest easy and replace your car quickly.
Do You Need GAP Insurance?
You don’t necessarily need to have GAP Insurance. However, it will come in handy under certain circumstances.
If you’re financing a car with a high depreciation rate, GAP insurance would be helpful. Most luxury vehicles and electric vehicles see plummeting value after the first few years.
Consider GAP insurance if your initial down payment on the vehicle was less than 20% of the car’s value. Usually, that means you’ll wind up owing the lender more than your car is worth.
Also consider GAP insurance if you’re leasing a vehicle. There is typically a large discrepancy in the event of a leasing accident, so you’ll want to be covered accordingly. However, be sure to check your lease agreement. Sometimes the leasing company will include GAP coverage in the initial contract.
If you drive more than 15,000 miles annually, GAP insurance is a good idea. The more you drive your car, the more the value depreciates. If you’re putting a ton of miles on it, you’re going to want an extra safety net.
If you are a single-car family and cannot afford to be without a car for any period, you’re going to want GAP insurance. In the event of a major accident, you might not be able to buy a new car right away because you still owe thousands of dollars on your old vehicle. GAP insurance ensures that you’ll be able to get behind the wheel of something new right away.
When Can You Forgo GAP Insurance?
While there are many reasons to purchase GAP insurance, there are several instances where it could be considered a waste of money.
If your car is worth more than the loan and you know your insurance company’s total loss payout will exceed the amount, you won’t need to spend on GAP insurance. But you need to make sure that you’re correct in this assumption. You don’t want to have an unpleasant surprise when that insurance check comes.
If you can continue making loan payments in the event of a total loss, you won’t have to get GAP insurance. But if you need another car fast, remember you’ll be paying for two car loans at the same time.
If in the event of a total loss, you won’t need to replace your vehicle. You can continue to pay out the original loan as if nothing happened. GAP insurance will not be a factor.
How Much Does It Generally Cost?
Now that you have a good understanding of what GAP insurance is and whether or not you’re going to need it, how much will it cost?
GAP insurance usually costs 5% of the portion of your annual insurance premium related to comprehensive and collision coverage.
Costs can vary depending on your car value, location, and driver history — but 5% is the average.
Where Should I Buy GAP Insurance?
A lot of dealerships offer GAP insurance, but you shouldn’t take them up on that offer. Instead, you should purchase GAP insurance from an actual insurance agency. Dealership prices can be up to four times higher than typical rates, which is an absurd amount of money to pay.
As for timing, you’ll want to purchase GAP insurance right after securing a car loan.
GAP insurance can be a total waste of money or an absolute lifesaver, depending on your specific circumstances.
When it’s time to purchase a new or used car, take a long hard look at how much the loan is, the depreciation value of the vehicle, and how much you intend on driving it. Based on that information, you will be able to make an informed decision as to whether or not you need GAP insurance for your vehicle.