So the first question to answer is, what is “Gap Insurance”?
Gap insurance, or gap protection, covers the difference between what you owe on your car and how much the car is worth.
Do I need Gap Insurance?
Not everyone needs gap insurance. Gap coverage is mainly used on new and used small vehicles or heavier trucks. Some financing companies even require it when buying a car. For a lot of drivers, a regular auto insurance policy is enough monetary protection to cover the costs of repair or replacement of a damaged or stolen car. But, if you total your car and the car’s cash value is less than the amount you owe on your lease or loan, that “gap,” is not covered by your normal insurance. Gap insurance can be considered a “debt-cancellation agreement” and covers the space between auto value and loan value.
If you will never owe more on your vehicle than what the car is worth, then you don’t need gap insurance. You can figure this out by doing a little research on the deprecation rate for your car. Using Kelley Blue Book and an online loan calculator, you can measure at what rate you will build equity in your car. By mirroring these tools you can figure out your equity at different parts of the loan term.
What causes the “gap” in the first place?
The gap is caused by negative equity that your vehicle may have. This is when your vehicle is worth less than what you owe on it. This can occur through a couple different avenues including:
- Taking out a long-term loan that means lower payments, but slower equity building.
- Deprecation of the vehicle. Cars lose value at different paces and the insurance company determines what the deprecation is for your car.
- Not putting enough money down. If you finance your car through a large loan and do not put a lot down, you can get upside down in how much you owe quickly.
When do I pay for Gap insurance?
Gap insurance is paid upfront and this makes the car owner or lease holder eligible for a refund if they sell or refinance their car. But check before you buy gap coverage that you are not already covered. Some leasing companies have gap coverage in the lease agreement already and some auto insurers include gap protection as part of their standard coverage. If not, you will buy it through your dealer, auto lender or insurance company. Also these policies vary in price from $100 one-time fee to a small fee every month added to your premium (in which case you would have to keep track and cancel the insurance when you close the “gap”).
A Paralegal’s Perspective
“In majority of cases gap coverage is worth it. Gap insurance is VERY inexpensive. If your car is a total loss from an auto accident, the insurance company will only pay you for the actual cash value of your car. Most insurance companies use the NADA program to calculate this actual cash value. This amount is almost always less that what you owe on your lien. The gap insurance pays the difference. This protects the client from having to pay any out-of-pocket or have a rollover into another car.”- Kelly M., Paralegal at Hancock Injury Attorneys