Everything You Need to Know About the Best Gap Insurance

Whenever a vehicle is totaled or stolen, a gap insurance policy will pay the difference between the car’s actual cash value at the time of the incident and the remaining balance needed to pay off a lease or loan. Although the word gap seems to refer to that difference, it actually means guaranteed asset protection. This additional insurance coverage protects a lender from losing money on the asset if you can’t pay off your loan or lease or cover the difference between what you owe on the vehicle and the insurance payout for your totaled or stolen car.

Choosing the best gap insurance company to provide your coverage requires research. You can get gap insurance from a variety of insurance companies, and the ideal one for you will depend on several factors. First, determine whether you need gap insurance coverage, then find out what rates the best gap insurance companies are offering to discover which one is right for you and your vehicle.

What Is Gap Insurance?

Gap insurance policies cover the difference between what you owe on your vehicle and the payout amount from an auto insurance provider if your car is totaled in an accident or stolen and not recovered. Some insurance companies offer gap coverage as a standalone policy, while in other cases, it’s an additional cover. If you don’t have a lien on your vehicle, you will not need gap insurance coverage. However, if you’re leasing or paying off a loan, you may choose to have gap coverage, and some lenders require it.

When to Consider Buying Gap Insurance

There are several situations when purchasing gap insurance is beneficial, including:

  • The vehicle is leased.
  • The lender requires gap insurance.
  • The loan has a high interest rate.
  • The term of the car loan is 60 months or longer.
  • There was no down payment, or it was less than 20% of the car’s value.
  • The negative equity from a previous loan is being rolled over into a new loan.
  • The vehicle is a luxury or high-end brand that has a high depreciation rate.

Having a loan or a lease doesn’t mean you have to carry gap insurance on your auto policy, but some lenders do require it for their protection. If you don’t think you can afford to pay the potentially thousands of dollars between what your car’s worth and what you owe in the event of a total loss, a gap insurance policy may be in your best interest.

What Is the Estimated Cost of Gap Insurance?

The typical cost of gap insurance varies depending on the insurance company, your annual premium, and individual factors, such as the value of the car, your age, and your ZIP code. Typically, you must have comprehensive and collision coverage, also known as full coverage, alongside gap coverage.

The Insurance Information Institute estimates that including gap insurance as additional coverage on your full coverage policy could add as little as $20 a year to your insurance premium. Other sources claim you might pay as much as $60 a year more for gap coverage, while Business Insider says that you’ll likely pay about 5% of the cost of your full coverage policy to add this type of cover. Finding the best insurance rates involves comparing rates from multiple insurers.

Keep in mind that you could be charged a flat fee between $400 and $800 for gap insurance when you first purchase your vehicle through a dealership or major lending company. For cars that are financed through a credit union, gap insurance may be less expensive. The downside of gap insurance is that if the coverage is added to your loan amount, you will have to pay interest on the insurance cost and the amount you borrowed.

What Are the Best Gap Insurance Companies?

You can get gap insurance when you lease or finance a vehicle through the dealership or the lender, but this route may cost you more in the long run. Adding it to your comprehensive and collision coverages through your car insurance provider may save you money. Some of the most popular gap insurance companies include:

  • USAA: Active-duty and retired military members and their families pay a flat rate of $269 for gap insurance through USAA.
  • State Farm: With an annual cost between $15 and $55, State Farm is a good company for gap insurance coverage because of its excellent discounts.
  • Nationwide: You can get a customized insurance plan through Nationwide that includes gap coverage for $20 to $50.
  • Liberty Mutual: A $50 annual gap insurance cost and an accident forgiveness option make Liberty Mutual one of the most popular gap insurance companies.
  • Allstate: For a gap insurance policy through Allstate, you’ll pay between $15 and $50, and this insurer is known for its excellent claims satisfaction and exceptional customer service.
  • Progressive: If you choose to go with Progressive for your gap insurance, you’ll pay around $60 annually.

What Gap Insurance Does and Doesn’t Cover?

Gap insurance policies are designed to protect you financially if your car is stolen or it’s considered a total loss by your auto insurance company after an accident, and you owe more than it’s worth. Gap coverage pays the difference between the car’s value and what you owe on the loan, or the negative equity you have in the vehicle.

For example, if you borrowed $45,000 to purchase your vehicle but the car’s actual cash value is only $35,000 when you still owe $40,000, you have negative equity of $5,000. If you don’t have gap insurance as part of your auto insurance policy, you will have to pay this out-of-pocket amount if your vehicle is totaled or stolen.

There are issues that gap insurance doesn’t cover that you should also be aware of before you opt for this additional coverage. With this type of policy, you will not be covered for engine failure, bodily injury, or repairable damage to a vehicle, such as cosmetic issues. Coverage for damage to your property or vehicle is provided by the collision and comprehensive portions of your auto policy.

How To Buy Gap Insurance Coverage

When you finance a new car, the dealership or lender may try to persuade you to buy gap insurance coverage from them for a flat rate. These fees will vary depending on the provider, but they are typically more expensive than adding gap coverage to your existing insurance policy. Even if a lender requires you to carry gap insurance, you don’t have to get coverage through them, as this will add to your overall interest and monthly payment.

Guidelines for obtaining gap coverage will vary depending on the insurance company, and each one may have different requirements. For example, they could state that you must be the vehicle’s original owner and that the coverage must be purchased within 30 days of buying the car.

You can purchase gap insurance in one of three ways:

  • Through your current insurance company as an add-on to your full coverage policy.
  • Through a lending company that charges a one-time, flat-rate fee that’s added to your monthly car loan payment.
  • Through the dealership, which also means paying a flat-rate fee and interest on the cost of coverage for the duration of the loan.

What Are the Alternatives to Gap Insurance?

Gap insurance coverage isn’t your only option if you want to protect yourself in the event your vehicle is totaled or stolen. Consider these alternatives to gap insurance if you want added protection for your loan:

Loan/Lease Payoff

A significant difference between gap insurance and loan/lease payoff insurance is when you can obtain each of these coverage options. Gap insurance is typically only available for cars that have never been titled, whereas loan/lease payoff coverage is available for new and used vehicles. With gap coverage, your insurance will pay the difference between the car’s actual cash value and what you owe. A loan/lease payoff policy only covers a percentage of the cash value, which could leave you with more out-of-pocket costs than a gap policy.

Several insurance companies offer loan/lease payoff coverage, including:

  • Progressive
  • Travelers
  • Esurance

New Car Replacement

The difference between new car replacement coverage and gap coverage is that this type of coverage will reimburse you the money you spend to replace your totaled or stolen vehicle with another car of the exact make and model minus the depreciation amount. So even if you have negative equity, new car replacement coverage will allow you to buy a new vehicle without having to cover the difference between what you owe and the cash value of your car.

New car replacement coverage is available from the following companies:

  • Travelers
  • Shelter Insurance
  • Safeco
  • Liberty Mutual
  • Farmers
  • Allstate

Better Car Replacement

For drivers who don’t have a new car, gap insurance and new car replacement coverage are typically not the best options. Instead, consider better car replacement coverage. With this type of cover on your car insurance policy, you’ll be able to purchase a vehicle that’s one year newer than your current car and has 15,000 fewer miles on it. You can’t get this coverage for leased vehicles, but it’s perfect for those who would prefer to upgrade their car if their insurance company makes a total loss claim on their vehicle.

Companies offering better car replacement coverage include:

  • Liberty Mutual
  • Hanover
  • Erie

Additional Considerations When Buying Gap Insurance

Not all insurance providers offer the same insurance products. If your current insurer doesn’t offer gap insurance, check with other companies, and gather and compare quotes to determine if switching to a new insurer is beneficial. If you finance your vehicle through a credit union or bank, gap insurance might be available for a flat rate, but this amount will be added to your auto loan, affecting your monthly payment and total interest.

Car dealerships tend to charge the most for gap insurance coverage, with flat rates of $800 or more. If you lease your vehicle, gap insurance might be included at no additional cost. Gap insurance purchased from a standard insurance company that offers the coverage can be the cheapest, adding an average of 5% to the monthly cost of your collision and comprehensive coverage.

The price of gap insurance isn’t the only factor to consider when choosing your insurance coverage. When making a final decision, it’s important to consider the length of time you need to carry gap insurance and how long it’s in effect. Some gap policies cover the deductible, but you need to know whether this is something you’re responsible for if you make a total loss claim. If you have a balance due from a previous car loan, most insurers providing gap insurance will not pay the balance you roll over into your new loan.

Is Gap Insurance Worth It?

Whether gap insurance is worth it depends on a variety of factors, and you may want to speak to your insurance agent to find out if this type of coverage is a good idea for you and your situation. If you’re worried about how you would cover your negative equity if your car were totaled in an accident, you may want to consider a gap policy or some type of alternative insurance coverage. If you have a used car that you own or owe very little, you may not benefit from having gap coverage on your insurance policy.

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