Learn how gap insurance works and if it’s for you.
If you are ever in a car accident, gap insurance can potentially save you thousands of dollars. If you have a loan or lease on your car, gap insurance – or guaranteed asset protection – recovers the difference between what you owe on your car and the actual value of your car if it is totaled. To determine if gap insurance is necessary, it is important to understand how it works and how to calculate your potential liability.
How Gap Insurance Works
If your car is totaled or stolen, standard comprehensive and collision car insurance pays for your vehicle’s replacement if it results in a total loss. The policies, however, only pay up to the car’s actual cash value or the pre-agreed coverage limit. At the time of a total loss, gap insurance covers you for the difference between what you owe on the vehicle and the depreciated actual cash value of your car. The difference, or the “gap”, varies depending on how quickly your car depreciates, the length of your loan term, and how big your down payment was.
Do You Need Gap Insurance?
If your coverage gap is a larger amount than you are willing to pay out of pocket, or greater than the cost of coverage, you may want to look into gap insurance.You may also want to consider buying gap insurance if you:
- Made a low down payment on your car
- Drive long distances
- Have a loan with a high APR or term
- Have a lease or loan that requires it
Gap insurance costs approximately $20 a month when purchased from your car insurance company. The cost is usually added to your existing auto insurance premium so you pay one bill. If possible, avoid purchasing gap insurance from a car dealership since they typically have higher prices. Dealership plans are usually based on the make, model and year of your car, plus a $500 flat fee for the insurance.
If you are currently making payments on a vehicle, contact your insurance company to ask them about gap insurance.