Is GAP Insurance Worth It?
GAP insurance can provide you with valuable protection if you owe a lot on an auto loan. Learn about how GAP insurance can help protect your car and your financial investment.
Guaranteed auto protection (also known as GAP insurance) is an insurance policy that reimburses you for the remaining balance on your auto loan if your vehicle is stolen or totaled, and you can no longer use it. GAP insurance may help if the remaining balance on your auto loan is larger than the insurance proceeds received for the car.
Is GAP insurance worth it? To decide whether it makes sense for you, here's how GAP insurance works.
Benefits of GAP Insurance
The main benefit of GAP insurance is that it can provide valuable financial protection if your car is totaled or stolen. If you are about to buy a brand-new car, GAP coverage can give you the peace of mind that your financial investment is protected. It may be wise to obtain this coverage anytime you owe more money on your car than it's worth. For instance, when your down payment isn't 20% or more of a vehicle's price, having GAP insurance for the first year or two might be a smart decision, since cars typically depreciate by up to 20% in the first year of ownership.
Let's say your car is stolen and you have $10,000 left on the auto loan, but your insurance company will only pay you $7,500 because that's their determined value of the car. If you have GAP, your insurance company may cover the remaining $2,500 to pay off the auto loan (depending on certain factors of your claim). If you don't have this type of insurance, you'll need to pay the remaining $2,500 out of pocket in order to pay off a car that you can no longer drive.
What GAP Insurance Doesn't Cover
One of the main downsides of GAP insurance is that it doesn't cover any damage that doesn't result in a total loss of the vehicle. GAP insurance also can't provide support if you're unable to make your car payments, you need repairs, you have to pay for a rental car while your vehicle is being repaired, or you want to purchase an extended warranty.
This type of insurance also won't reimburse you for the value your car loses after an accident. GAP insurance only provides support when you have to pay the difference out of your own pocket to pay off an auto loan for a car you are no longer able to drive.
It’s also worth noting that GAP insurance does not cover missed payments or interest accrued on late fees.
The Cost of GAP Insurance
Generally, it only costs a few dollars a month to add GAP insurance to your comprehensive auto insurance policy. According to the Insurance Industry Institute, you can secure this type of coverage as an add-on to your annual premium for just $20 a year. This is a general number — what you will pay can vary based on your age, driving record, state, and the model of vehicle you own. That said, if you purchase GAP insurance through a dealership and finance this coverage, you may pay interest on that cost.
You can expect a major insurance company to offer you rates that amount to around 5% to 6% of the collision and comprehensive premiums on your auto insurance policy. If you lease a car, you are generally required to have GAP insurance. More often than not, GAP insurance is included in lease agreements.
Do You Need Gap Insurance?
So, is GAP insurance worth it for you? The answer will depend on your unique needs, financial situation, and personal risk tolerance. GAP insurance isn't always useful, especially if you have very little left to pay on your auto loan.
Taking on GAP insurance can be more beneficial if:
- You made a down payment of 20% or less
- The car is financed for 60 months or longer
- You leased the vehicle
- Your car is expected to depreciate in value faster than the average car
- You rolled over negative equity from an old auto loan into your new loan
If you decide that GAP insurance is right for you, it will usually cost you less to purchase it through your main auto insurance provider instead of a car dealership. Generally, insurance companies may require that you have both comprehensive and collision coverage before they will provide you with GAP insurance. Each insurance provider may also have their own unique set of conditions you need to meet to qualify, which they can walk you through when you apply.
Take some time to crunch the numbers and see if GAP insurance is something you find valuable.