To find the coverage you need, you can look to a car dealership, your current auto insurance provider, or other auto insurance providers. However, it’s important to consider the pros and cons of each of these gap insurance providers so you can find the best deal.
What Is Gap Insurance?
Gap insurance is a type of auto insurance that covers the gap between what standard car insurance pays for a total loss and what you owe to your lender or leasing company. It’s necessary in many cases because standard collision and comprehensive coverage will only pay out the actual cash value (ACV) of a vehicle at the time of the loss—regardless of how much you owe on your loan or lease. Because newer vehicles depreciate rapidly, it’s common for buyers to be upside-down on their auto loans for a few years—meaning they owe more than the vehicle is worth. Gap insurance helps ensure you don’t owe a lump sum if your vehicle is totaled or stolen during that time.
How Gap Insurance Works
Once you realize there’s a gap between the settlement you receive from your standard auto insurance provider after a total loss and what you owe your lender or leasing company, you should contact your gap insurance provider right away. It will then review the claim. Upon approval, the insurer will pay the outstanding amount you owe up to your policy’s maximum limit. Let’s look at an example. If you walked outside in the morning to find your car missing, you’d report it stolen. If you couldn’t recover it, you could file a claim with your insurance provider to recover the costs. However, your primary insurer would only be required to cover the vehicle’s ACV at the time of the loss. Say you bought the car for $30,000 and still owe $25,000 on the loan. But if your car’s ACV is $20,000, that’s all you’ll receive from your primary auto insurer—leaving you with a $5,000 deficit. That’s when you’d call your gap insurance provider and file a claim for the additional $5,000.
Where To Look for Gap Insurance
Gap insurance helps reduce the risk of adding insult to injury after a total loss. You won’t have to worry about owing more than your insurance payout on an upside-down vehicle loan or lease. But where can you go to get coverage? Here are your options.
Buying Gap Insurance From Your Insurance Company
You can look to the company that provides your current auto insurance policy to see if it offers gap insurance. It can be easier to work with one company for all your auto insurance coverage needs. However, not all insurance companies offer gap insurance; for example, Geico doesn’t provide this coverage.
Buying Gap Insurance Online
How do you shop around for gap insurance? It’s easy—many providers list their gap insurance offerings online. Some of the well-known companies that offer gap insurance online include Liberty Mutual, AAA, Nationwide, Travelers, and State Farm, although details and availability may depend on your state. Get a few quotes and compare them side by side to find the best deal for your needs.
Buying Gap Insurance From the Dealership
If you’ve bought or leased a vehicle from a dealership, you’ve probably been presented with gap insurance. Dealers will often strongly suggest you buy it from them and may list a variety of reasons. However, as is the case with buying any type of insurance, it’s best to shop around to make sure you’re getting the best price and coverage for your needs.
Do You Have To Purchase Gap Insurance?
Whether you have to purchase gap insurance or not depends on your situation. In most cases, gap insurance is required when you lease a vehicle but not when you finance one. However, exceptions may apply, so read your agreement carefully. If it isn’t required, next comes the question of whether you should get gap insurance or not. To decide, it’s important to think about what would happen if you didn’t have this coverage and your vehicle was stolen or totaled. To figure that out, you’ll need to consider the vehicle’s ACV and how much you owe on the loan. While depreciation varies based on a vehicle’s make, model, and year, new vehicles lose about 60% of their value on average over the first five years. It’s often a good idea to keep gap insurance until the amount you owe is equal to the vehicle’s value. You may also want to consider factors like your driving history and the crime rate in your area.
Gap Insurance vs. Loan or Lease Coverage
Some lenders offer loan/lease payoff coverage, which is similar to gap insurance but may have a few important differences. Like gap insurance, loan/lease coverage helps pay the difference between what you receive from your insurer and what you owe on your lease or loan. However, it’s essential to read the details carefully because loan/lease coverage may include limits or other differences in coverage. For example, Progressive loan/lease payoff coverage only pays up to 25% of your vehicle’s value. If you owe more than 25%, you would still be responsible for some costs out of pocket.
How To Save on Gap Insurance
If you need gap insurance, the number-one way to save money is to not buy it from the dealer. If you purchase gap insurance from the dealer, the cost will typically be rolled into your lease or loan, which means you’ll likely pay interest on it. Buying gap insurance from an insurance company saves you money because you can avoid paying interest on the cost of coverage. Plus, you can shop around to find the best deal and can easily cancel the coverage at any time if you no longer need it. Before purchasing this type of insurance, it’s also important to ensure you actually need gap coverage. Check with your insurance company to see if gap insurance is already included in your policy. Next, crunch the numbers to find out if you would owe a large amount in the event of a total loss. If you find you reach a point where the cost of gap insurance outweighs the benefit, cancel the policy. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
