Whenever a vehicle has been totaled in an accident or it is stolen, gap insurance will pay the difference between the car’s value at the time of the incident and the remaining balance of a lease or loan. Although the word “gap” seems to refer to that difference, it actually means “guaranteed asset protection.” Choosing the best gap insurance for your vehicle generally requires that comprehensive and collision coverage be purchased.
When to Consider Buying Gap Insurance
There are several situations where it is beneficial to consider purchasing gap insurance. These include:
- The vehicle is leased.
- The lender requires gap insurance.
- The term of the car loan is 60 months or longer.
- No down payment is required, or the down payment is less than 20 percent.
- The loan has a high interest rate.
- Negative equity from a previous loan is being rolled over.
- Because of faster depreciation, vehicles with a high value or considered a luxury vehicle may require gap insurance.
Estimated Cost of Gap Insurance
The typical cost automobile insurers charge for gap insurance ranges from $20 to $40 yearly. The cost varies for each person based on individual factors such as the value of the car. You may also be required to purchase collision and comprehensive coverage. Finding the best insurance rates is best accomplished by comparing rates with multiple insurers.
According to NerdWallet, a lender has the option to charge a flat fee for gap insurance that can range between $500 to $700. For cars that are financed through a credit union, gap insurance may be less expensive. The downside is if the coverage is added to your loan, you will have the added expense of paying interest on the insurance.
For buyers who choose to purchase their gap insurance through an online provider, the typical estimated cost is $300.
Insurance Companies Offering Gap Insurance
While searching for coverage, according to Insurify.com, some of the largest companies are offering stand-alone gap insurance to be included as an add-on to the car insurance policy. These include:
- USAA.
- Travelers.
- Safeco.
- Nationwide Insurance.
- Liberty Mutual.
- Auto-Owners Insurance.
- American Family.
What Coverage Gap Insurance Does and Does Not Provide
Two things gap insurance covers are theft and the difference between the amount the car is worth and what is still owed on the loan. This is referred to as negative equity.
Three things gap insurance does not cover are if the vehicle’s engine fails, bodily injury, and damage incurred to a vehicle that is determined to be non-totaled. In the non-totaled situation, coverage is provided by the collision and comprehensive portion included in your auto policy.
When and Where to Buy Gap Insurance
It is generally expected that gap insurance will need to be purchased, at a minimum, within three years of purchasing a new vehicle. Guidelines for insurance companies vary and may have additional requirements such as you must be the original owner and the vehicle is between two and three years old at the maximum.
Gap insurance can be purchased in one of three main ways. These include:
- Included by the insurer as part of the payment for regular vehicle insurance.
- Choosing to buy gap insurance from a company that charges a one-time fee.
- The insurance is included in the loan payment to the lender or the dealership, which means paying interest for the duration of the loan for the cost of the coverage.
Alternatives to Gap Insurance
Protecting your vehicle if stolen or totaled can also be provided by a loan/lease payoff, which differs from gap insurance. Another option is new car replacement coverage. A third option is better car replacement coverage.
Loan/Lease Payoff
A significant difference between gap insurance and a loan/lease payoff is the latter is available for used cars whereas gap insurance is only available for new cars. It also pays an estimated 25 percent of the value of your car along with the claim versus the balance of the debt.
Several insurance companies offering loan/lease payoff include:
- Progressive.
- Farmers.
- Esurance.
New Car Replacement
If your concern is buying a new vehicle versus paying off the old one, considering new car replacement coverage may be a better option. This type of coverage helps with the purchase of a new vehicle minus your policy’s deductible.
New car replacement coverage is available from the following companies.
- Travelers.
- Shelter Insurance.
- Safeco.
- Liberty Mutual.
- Farmers.
- Allstate.
Better Car Replacement
For owners who do not have a new car, gap insurance and new car replacement coverage may not be available from your insurer. In this case, an alternative is better car replacement coverage.
Companies selling better car replacement coverage include:
- Liberty Mutual.
- Hanover.
- Erie.
- Chubb.
- Acuity.
Additional Things to Consider when Buying Gap Insurance
If your current insurer does not offer gap insurance, check with other companies, and compare quotes to determine if switching to a new insurer is beneficial. If your vehicle is financed through a credit union or bank, it is possible gap insurance is available from $200 to $700.
Dealerships tend to charge the most for gap insurance coverage. The cost can range in the area of $400 to $700 with the payment due upfront. If the payment can be included in the vehicle loan, factor in the interest you will be paying on the extra insurance. The same interest payment situation will most likely apply wherever you choose to get a vehicle financed with gap insurance included.
Vehicles being leased may also have gap insurance included at no additional cost. Gap insurance purchased from a standard insurance company that offers the coverage can be the cheapest averaging around a 5 percent to 6 percent increase to the cost of collision and comprehensive coverage.
The price of the gap insurance coverage is not the only issue to be considered when choosing where to purchase coverage. Several important things to keep in mind when making a final decision are the length of time the gap insurance is needed and how long it is actually in effect. Also, some, not all, gap policies pay the deductible. Lastly, if you have a balance due from a previous car loan, most insurers providing gap insurance will not pay that balance.
Check this out if you need additional information, resources, or guidance on car insurance.
Sources:
Gap Insurance: What It Is and Who Needs It
7 Top Gap Insurance Companies in 2021
How Does GAP Insurance Work after a Car Is Totaled?
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