What is gap insurance?
Gap insurance is optional add-on car insurance coverage that can help you cover the “gap” between the amount you owe on your car and its actual cash value (ACV) in the event it is totaled in a car accident or stolen.
If you’re planning on leasing a car or have already done so, however, you may be wondering if you should buy gap insurance or possibly where to buy gap insurance. The answer is, it depends.
Imagine you’ve been involved in an accident and your car has been damaged beyond repair and must be replaced. You still owe $18,000 on your car loan but the vehicle is now worth only $15,000. With gap insurance, you can cover the $3,000 difference between what you owe on your car and what it’s worth, after the deductible.
When might gap insurance be a good idea for leased cars?
Like any car or SUV, leased vehicles depreciate quickly. In fact, most vehicles’ value depreciates about 20 percent in the first year of ownership, according to Allstate. Therefore, if you didn’t put much money down and you still owe a sizable amount on your total lease payment, you’ll likely owe more than the car is worth if you get into an accident. That’s especially true if the accident occurs soon after you drive off the dealer’s lot and the car hasn’t suffered as much depreciation.
It’s a good idea to compare your total cost — including taxes and anything else you rolled into the lease — to the car’s MSRP or agreed upon sales price, and see if you have a gap from the start. In the event you do, gap insurance is a good idea.
Keep in mind, however, that the gap is constantly fluctuating, making it important to know where to buy gap insurance. The difference between what you owe and what the car’s worth shrinks as you make monthly payments and as the car depreciates. So, you definitely won’t need the coverage for your entire lease period. You may only need it for a few months, depending on how good of a deal you negotiated.
How do you buy gap insurance?
You may be pleasantly surprised to learn that in many leases, gap insurance is already built into the contract. Check your agreement carefully to determine whether it’s included or not. Keep in mind the term gap insurance may not be used in the contract, and a more general term such as lease coverage might be used instead.
Here’s how to buy gap insurance: if you don’t have gap insurance coverage built into your car-lease contract, then you may want to add it to your current auto insurance policy. You may also buy it as a one-time fee through a lender or dealership and roll that additional cost into your lease payment. However, many dealers charge $500 to $1,000 for the add-on coverage, and often require a large down payment up front.
Where to buy gap insurance matters. According to the Insurance Information Institute, most car insurers cover gap insurance and it tends to be cheaper than through a dealer. Gap insurance with comprehensive and collision coverage only adds about $20 to your annual premium. Many car insurers also offer gap insurance policies as add-ons. For instance, Allstate and Nationwide both have gap insurance.
In addition, you may buy it as a one-time fee through a company that specializes in selling stand alone gap insurance, like gapdirect.com.
Although you may land lower monthly payments by leasing instead of buying a car, leasing is still an expensive financial transaction. Therefore, it can be tempting to simply forgo gap insurance if it isn’t included in your contract. However, after evaluating your lease situation, you may find that buying gap insurance is well worth the extra money as it may potentially save you thousands of dollars down the road. However, be sure to shop around on where to buy gap insurance, since prices can vary.
Frequently asked questions
What is gap insurance?
In short, gap insurance covers the difference between how much you still owe on the car and the decreased market value of the car. For instance, if you still owe $35,000 on the car, but the car is only worth $25,000 market value, then gap insurance covers you for that $10,000 difference.
Where do you buy gap insurance?
You have three options for where to buy gap insurance: through the dealership, an auto insurer or a company that specializes in stand alone gap insurance.
Where can I get the best deal on gap insurance?
Gap insurance policies through dealerships can be famously expensive. Make sure to shop around between the dealership, auto insurers and companies that specialize in gap insurance.
What does gap insurance cover?
Gap insurance policies tend to cover damages from an accident. Some policies may extend beyond accidents. For instance, gap insurance through Nationwide may cover theft.