Should You Buy Gap Insurance?

The acronym GAP stands for guaranteed asset protection. Gap insurance, or gap coverage, is an optional financial product that comes into play during an auto purchase. Almost anyone who finances a car could benefit from this extra auto insurance coverage.

What is gap insurance?

Gap insurance is a type of car insurance that covers the gap between what you owe on the automobile and what it's actually worth. Consider that when buying a vehicle, you typically don't just pay the actual cash value (ACV). Frequently, there are add-ons and services that you finance along with the car. Sometimes you even add negative equity from a prior auto loan.

After an accident, your insurance company will determine the actual cash value by subtracting depreciation from the sticker price. Therefore, after a bit of driving around, most consumers end up owing more on an auto than its actual cash value. Some are upside down as soon as they sign their loan papers.

How does it work?

Let's say you are looking at buying a 2019 Chevrolet Corvette in its iconic silvery-white color. Kelley Blue Book puts the MSRP between $56,590 and $133,995. The sticker price for the model you like is $75,000. So you go for it! 

On the road, the V8 engine hums along beautifully, and more than 455 horses gallop under the hood. You love the 7-speed manual transmission. 

But then, a driver who's texting while driving, T-bones you. Your brand new corvette is a total loss. What’s more, the car has already depreciated by about 20% as estimated by CARFAX. And given your high interest rate, you’re upside down on the loan.

What this means is that you now owe more on the car than the actual cash value that the insurance will pay for. Without gap coverage, you would have to pay your financing company for the amount the insurer won't cover. With gap coverage, while you aren’t covered for all financial losses, you might not be on the hook for the full amount. 

Who should buy gap insurance?

Covering the value gap makes sense when you finance a vehicle, and you will owe more than the car is worth. This is frequently the case when you have a low down payment or end up with a high interest rate. The Insurance Information Institute recommends gap insurance for those with  down payments that are below 20% or have lending terms that exceed 60 months. 

Gap insurance is also an excellent option for someone who's leasing a car.

If you pay the car with cash outright, there's no gap. The same is true for a consumer with an auto loan that has no gap. If you're not upside down, there's no need to invest in this type of car insurance.

If you do decide to buy gap insurance, make sure you keep an eye on your loan. As soon as you no longer owe more than the car is worth, it's time to cancel the coverage. You've closed the gap.

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What is not covered?

Gap insurance is no panacea. It covers a lot of things but not everything. It's there to protect you against financial losses from negative equity, which could be the result of an accident with a total loss or theft.

However, there are other losses it doesn't cover.

• Deductible. The gap doesn't pertain to the deductible. If you have selected a high deductible to drive down insurance policy costs, you still have to pay it before the gap coverage takes effect.
• Bodily injury or property damage. Gap insurance only covers the vehicle. If you incurred medical costs or damaged that new big screen TV you were bringing home, you're responsible for those items. Check your complete vehicle insurance policy, though. You may be covered by another type of car insurance in your policy.
• Mechanical failure. Mechanical failure isn't covered by gap insurance. Let’s say you make a turn onto the highway, and an engine bolt comes loose. The car stalls. You'll need a new engine, which is more expensive than what the car is worth. In this instance, the gap clause doesn't come into play since you weren't involved in an accident that made the vehicle unusable. 
• At-fault accidents. Most insurance providers are careful to point out that the gap coverage applies to crashes that aren't your fault. If you're the one texting while driving and end up causing an accident, the carrier may not pay. It depends on the insurance laws in your state and on the details in your policy paperwork.

Should I buy coverage from the dealer?

If you’re buying a car from a dealership, they will likely offer you gap coverage. 

However, don't buy this type of insurance from the dealer. They typically markup the coverage, which means that you pay more than you have to for the protection. 

How to buy gap insurance

Your auto insurance provider is a good place to start when you need to buy gap insurance. One call and an agent should be able to provide you with a quote based on your vehicle's actual cash value, your driving record, your state, and other factors that determine vehicle insurance prices in your area.

Once you cover the gap, comprehensive and collision coverage continue to protect your vehicle. Add additional coverages as necessary to protect you against other financial losses.