Where to Purchase Gap Insurance for Your Car
Information to Help You Decide Where to Purchase Gap Insurance
Did you know you do not have to buy gap insurance from a dealer? You may have several options to purchase your gap insurance if you decide to buy it when you purchase or lease a car. Here's what you need to know.
What Is Gap Insurance?
Gap insurance protects people who have financed or leased their car from having to pay more money than the car is worth in the event of a total loss. It is important to understand why gap insurance is important and how it works if you are looking to buy it.
3 Options When Shopping for Gap Insurance on Your New Car
- From your insurance company—most companies offer gap insurance, always check the insurance company first
- From an online insurer that offers Gap Insurance
- From the dealership
If you aren't sure where to find your gap insurance, and you would like some help, or feel pressured to purchase it at the dealer, you can contact your insurance representative or state insurance commissioner for further help or guidance on your options.
How Gap Insurance Works in a Car Insurance Claim
If you have a total loss, or someone steals your car and the value of your car is less than what you owe, you would owe the lienholder, bank, or lessor the money out of your pocket. This is because your insurance policy only pays the actual cash value of the vehicle at the time of an accident or claim, and not what you owe on it.
For example, you purchase or lease a car for $30,000. You finance the car over seven years. During the term of the financing, you will be paying interest, so even though the car value is $30,000, you are really financing the value of the car plus whatever interest and fees get added to the financing or lease. Let's say that amount totals $35,000, just to keep things easy. So you've agreed to pay $35,000 over seven years. Your car is only valued at $30,000. Your payments are about $420 a month. After a year and a half, you've paid off $7,560, you still owe $27,440. You have a total loss, either because:
- Someone steals your car
- Hits your car and the damage is more extensive than the value of the car,
- You have a responsible accident
The insurance company without gap insurance pays the actual cash value of the vehicle at the time of loss. Let's say after a year and a half the actual value of the car is $24,000. The insurance company tells you they are giving you $24,000 for the total loss. Sounds great, except when you check how much money you owe on your financing, you realize that you are $3,440 off to pay off your car. If you had a responsible accident, you will also have to pay the deductible, which may put you close to $4,000 out of pocket with no car to show for it. This is when gap insurance is important.
Do You Have to Buy Gap Insurance?
Many people get the sense that they have to purchase gap insurance, however you are usually not obligated to buy gap insurance as part of minimum car insurance requirements. The exception is if you're leasing a vehicle. The terms of your lease agreement may require that you carry gap insurance.
Check for the Gap Waiver Provision in a Lease Agreement
Before you purchase gap insurance, make sure and check if you need it. Some agreements through finance companies or car leasing companies may already have an included "Gap Waiver Provision" that will forgive you for the gap between insurance payout, and the amount you owe.
Do not assume you have a gap waiver provision, because not all contracts have this provision, but if you are lucky enough to have one, it makes a lot of sense to find out before wasting your money.
Some dealers and finance companies may "package" the gap insurance in with your new car purchase or lease. Beware of this practice and make sure to get all the facts because it could cost you a lot more money.
What Could Make Gap Insurance More Expensive?
When you add gap insurance to your car loan or lease, you may end up paying interest on the gap insurance because it may become part of the amount financed.
In cases like this, you could pay more for the gap insurance because of the finance and interest fees if you add it to your car loan.
By contacting your insurance agent and finding out the cost of adding gap insurance to your insurance policy, you would not be paying the interest like on a car loan and lease.
If you think of it in these terms, there's a good chance you will be saving yourself a lot of money by choosing an option that does not work itself into your loan payments.
By purchasing gap insurance somewhere other than the dealer, you may also benefit from the option to cancel the coverage at any time if you decide the gap insurance is no longer necessary for you. When it is financed into your loan or lease, you will be paying it off for the term of the financing.
Tips Before You Purchase Gap Insurance
- Always check first with your insurance company to see if they already include gap insurance in your car insurance policy. There is no reason to purchase gap insurance if you already have the coverage. There may be an endorsement you can add for a small premium,
- Make sure you need gap insurance. Gap insurance is useful if you have taken a loan out on a vehicle and you are concerned that the vehicle is or will depreciating faster than you are paying off the loan or lease. You can check current car values to get an idea of depreciation on Edmunds.com or Kelley Blue Book. This is just to give you an idea, there is no firm way to know the value of your vehicle at the time of loss, but you can certainly do some research to understand what your risks might be.
- Make sure you can cancel the gap insurance at any time you decide there is no longer any value in the gap coverage. For example, when your loan is paid down enough that your vehicle is worth more than what you owe.
Loan or Lease Coverage From an Insurance Company
If you call your insurance company and they offer you loan/lease coverage instead of "Gap Insurance" it may just be a matter of different terminology for the same thing. Ask them to describe the coverage and how it applies to you. The option to add it to your existing policy may save you a lot of money because you won't be financing the cost of the coverage in with your car loan. You may also be able to cancel it at any time which is an advantage after a few years when you've paid your loan down.
Should You Renew Your Gap Insurance?
Assess the need for gap insurance from year to year. As the balance of your loan decreases, your need for gap insurance may also disappear.
Nationwide. "Gap Insurance," Accessed Nov. 19, 2019.
CarInsurance.com. "What Insurance Companies Sell Gap Insurance?" Accessed Nov. 19, 2019.
Allstate. "What Is Gap Insurance And How Does It Work?" Accessed Nov. 19, 2019.
Progressive. "What Is Gap Insurance?" Accessed Nov. 19, 2019.
Insurance Information Institute. "What Is Gap Insurance?" Accessed Nov. 19, 2019.
New York State Department of Financial Services. "RE: Gap Waivers and Gap Insurance," Accessed Nov. 19, 2019.