What is Gap Insurance?

Gap insurance is a type of auto insurance that covers the difference between the actual cash value of a car and the balance still owed on the car loan or lease. This type of insurance is important for car owners because it helps to protect them from unexpected financial losses in the event of an accident or theft.

How Does Gap Insurance Work?

When you buy a car, you usually have a loan or lease agreement to pay off the car over a set period of time. However, cars depreciate quickly and can lose up to 20% of their value in the first year alone. This means that if your car is totaled or stolen and you owe more on your loan than your car is worth, you would be left with a financial gap.

This is where gap insurance comes in. If you have gap insurance, your insurer will pay the difference between the actual cash value of your car at the time of the loss and the balance remaining on your loan or lease, up to the policy limit.

Example:

Let’s say you bought a car for $25,000 and took out a loan for $20,000 to pay for it. After a year of ownership, your car is worth $18,000, but you still owe $16,000 on your loan. If your car is totaled, your regular insurance policy will pay you $18,000, but you will still owe $2,000 on your loan. However, if you have gap insurance, your insurer will pay the $2,000 difference, so you won’t have any out-of-pocket expenses.

Types of Gap Insurance

There are three main types of gap insurance:

It’s important to note that gap insurance is usually only available for new cars, and not for used cars or cars that are more than a few years old.

FAQ

Is Gap Insurance Required?

No, gap insurance is not required by law, but it is highly recommended for car owners who have loans or leases on their vehicles.

How Much Does Gap Insurance Cost?

The cost of gap insurance varies depending on the type of coverage you choose, the value of your car, and the length of your loan or lease agreement. However, it typically costs between $200 to $600 for a two to three-year policy.

How Do I Get Gap Insurance?

You can purchase gap insurance from your auto insurance provider or from the dealership where you bought or leased your car. It’s important to shop around and compare prices to get the best deal.

When Can I Cancel Gap Insurance?

You can usually cancel gap insurance after you have paid off your car loan or lease agreement or if you no longer own the car. However, it’s important to check with your insurer or dealership to see if there are any cancellation fees or penalties.

Is Gap Insurance Worth It?

Whether or not gap insurance is worth it depends on your individual situation. If you have a new car and a long loan or lease agreement, gap insurance can provide valuable coverage in the event of a loss. However, if you have an older car or have paid off your loan, gap insurance may not be necessary.