Did you know you don’t have to buy gap insurance from a dealer? You may have several options for purchasing your gap insurance if you decide to purchase it when you buy or lease a car. This is 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’s important to understand why gap insurance is important and how it works if you’re looking to purchase it.
3 options when buying gap insurance on your new car
- From your insurance company – most companies offer gap insurance, always check with the insurance company first
- From an online insurer offering Gap Insurance
- From the dealer
If you’re not sure where to find your gap insurance, and want help, or feel pressured to buy it from the dealer, you can contact your insurance representative or state insurance commissioner for further assistance or guidance on your options.
How Gap Insurance Works on a Car Insurance Claim
If you have a total loss, or someone steals your car and your car is worth less than what you owe, you will owe the lienholder, bank, or lessor money out of 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.
You have a total loss, either because:
- someone steals your car
- You hit 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. If you were in a responsible accident, you’ll also have to pay the deductible, which can put you close to $4,000 out of pocket without a car to show for it. This is when gap insurance is important.
Do you have to buy gap insurance?
Many people have the feeling that they have to purchase gap insurance, however, you are generally not required to purchase gap insurance as part of your minimum auto insurance requirements. The exception is if you are renting a vehicle. The terms of your lease may require you to have gap insurance.
Check the gap waiver provision in a lease
Before you buy vacuum insurance, be sure to check if you need it. Some agreements through finance companies or car leasing companies may have a “Gap Waiver Provision” included that will forgive you for the gap between the insurance payment and the amount you owe.
Don’t assume you have a gap waiver provision, because not all contracts have this provision, but if you’re lucky enough to have one, it makes a lot of sense to find out before you waste your money.
Some dealers and finance companies may “bundle” gap insurance with your new car purchase or lease. Be careful with this practice and make sure you get all the data 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 financed amount.
In cases like this, you could pay more for gap insurance due to finance and interest fees if you add it to your auto loan.
By contacting your insurance agent and finding out the cost of adding gap insurance to your insurance policy, you would not pay the interest like on a car loan and lease.
If you think about it in these terms, there’s a good chance you’ll save a lot of money by choosing an option that doesn’t work out on your loan payments.
By purchasing gap insurance somewhere other than the dealership, you may also benefit from the option to cancel coverage at any time if you decide gap insurance is no longer necessary for you. When you finance your loan or lease, you’ll pay it back over the term of the financing.
Tips before buying gap insurance
- Always check with your insurance company first to see if they already include gap insurance in your auto insurance policy. There is no reason to buy gap insurance if you already have the coverage. There may be a backup that you can add for a small premium,
- Make sure you need gap insurance. Gap insurance is helpful if you’ve taken out a loan on a vehicle and you’re concerned that the vehicle will or will depreciate faster than you’re paying off the loan or lease. You can check current car values to get an idea of depreciation at 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.
- Be sure to cancel gap insurance any time you decide there is no longer any value in gap coverage. For example, when your loan is paid off enough that your vehicle is worth more than it owes.
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 be a matter of different terminology for the same thing. Ask them to describe the coverage and how it applies to you. Adding it to your existing policy can save you a lot of money because you won’t be financing the cost of coverage with your auto loan. You can also pay it off at any time, which is a plus after a few years when you’ve paid off your loan.
Should You Renew Your Gap Insurance?
Evaluate the need for gap insurance from year to year. As your loan balance decreases, your need for gap insurance may also disappear.