Is Gap Insurance Required?

Gap insurance is an optional insurance product that covers the difference between the actual cash value (ACV) of your vehicle and the amount you owe on your loan or lease. In the event of a total loss or theft, gap insurance can help you avoid being stuck with a large balance on a vehicle you no longer own. But is gap insurance required? Let’s explore the answer to this question in more detail.

What Is Gap Insurance?

As mentioned, gap insurance is an optional insurance product that covers the “gap” between the ACV of your vehicle and the amount you owe on your loan or lease. If your vehicle is totaled or stolen, your car insurance will typically pay out the ACV of the vehicle. However, if you owe more on the loan or lease than the car is worth, you will be responsible for paying the difference out of pocket.

This is where gap insurance comes in. Gap insurance will cover the difference between the ACV and the amount you owe, ensuring that you are not left with a large balance to pay off on a vehicle you no longer own.

Is Gap Insurance Required?

In short, gap insurance is not required by law. However, there are certain situations in which gap insurance is highly recommended.

When Should You Consider Gap Insurance?

If you are financing or leasing a vehicle, you should consider gap insurance. This is because new vehicles typically depreciate rapidly in their first few years of ownership. If you are financing or leasing a vehicle and you are involved in an accident or your vehicle is stolen during this depreciation period, you may owe more on the loan or lease than the car is worth.

For example, let’s say you finance a $25,000 car with a $2,500 down payment. You owe $22,500 on the loan. If you are involved in an accident and your car is totaled after one year of ownership, the ACV of the car may only be $18,000 due to depreciation. If you do not have gap insurance, you will be responsible for the $4,500 difference between the ACV and the amount you owe on the loan.

Another situation in which you may want to consider gap insurance is if you are leasing a vehicle. Most leases require gap insurance, so if you are leasing a vehicle, you will likely be required to purchase it anyway.

When Should You Skip Gap Insurance?

If you paid cash for your vehicle or you have a loan with a low balance, you may not need gap insurance. Additionally, if you have a vehicle that does not depreciate quickly, such as a classic car or a luxury vehicle, you may not need gap insurance.

How Much Does Gap Insurance Cost?

The cost of gap insurance varies depending on the type of vehicle you have, the length of your loan or lease, and the insurance company you choose. However, gap insurance typically costs between $20 and $40 per year.

FAQs

Do I need gap insurance if I have full coverage?

Full coverage insurance will cover the ACV of your vehicle, but it will not cover the difference between the ACV and the amount you owe on your loan or lease. If you are financing or leasing a vehicle, you should consider gap insurance regardless of whether you have full coverage.

Does gap insurance cover my deductible?

No, gap insurance does not cover your deductible. Gap insurance only covers the difference between the ACV of your vehicle and the amount you owe on your loan or lease.

Can I purchase gap insurance after I buy my car?

Yes, you can purchase gap insurance after you buy your car. However, it is recommended that you purchase gap insurance when you first finance or lease your vehicle, as this is when you are most at risk for owing more on the loan or lease than the car is worth.

Conclusion

While gap insurance is not required by law, it is highly recommended for those who are financing or leasing a vehicle. Gap insurance can help you avoid being stuck with a large balance on a vehicle you no longer own in the event of a total loss or theft. If you are considering purchasing gap insurance, be sure to shop around and compare rates from multiple insurance companies to ensure that you are getting the best deal.