Understanding Gap Insurance: Is It Right for You? 

You have a quality auto policy with a brand-name insurer. You’re current with your premium payments, so when you file a claim, your insurer pays up. But there’s a bit of a hitch — somehow, you’re still hundreds, or even thousands, of dollars in the hole. Isn’t this covered by my auto insurance? Actually, no. 

Gap insurance, also known as cheap guaranteed auto protection, is the low-cost solution to this crisis. Here’s what gap insurance is, what it covers, and how little it will cost you to avoid the sort of financial problems this ingenious product handles. 

What Is Gap Insurance? 

The easy answer is that it stands for “guaranteed asset protection.” But what does that mean? The asset, in this case, is your insured car. Here’s the problem that gap coverage addresses: You paid plenty for that shiny new vehicle in your garage, but it loses its value quickly. That’s due to an economic certainty called “depreciation.” 

Your home will almost surely gain in value. Hopefully, so will your retirement investment fund and the diamond and gold necklace you inherited from your grandmother. In all those cases, you should be able to sell the object for more — maybe a lot more — than what you paid for it. That won’t be the case with your new car or truck. The problem is that it starts losing value as soon as you drive off of the dealer’s lot. 

Recognizing When Gap Insurance Is a Smart Bet 

When do you need gap insurance? Say you financed the purchase of a $35,000 vehicle. A few months later, you get into an at-fault accident and total your new ride. No problem. No one was hurt. And you’re fully insured. 

Sure enough, your insurer cuts your finance company a check for the vehicle’s actual cash value, or ACV. That’s based on its Blue Book value for age and condition. The problem is that the check is for $25,000, and you still owe the finance company $30,000. So, in addition to not being able to conveniently get to work because you have no car, you also still owe the finance company $5,000 for a vehicle that’s now scrap metal. 

Unless you have gap coverage. 

Situations That Demand Consideration of Gap Protection 

The above scenario is an example of how depreciation works. When it’s relatively new and you still owe plenty on it, your vehicle can lose value at a faster rate than you pay it off. But that won’t be a fact forever. At a certain point, depending on how much you pay in monthly car payments, the make and model of the vehicle, and other factors, the amount you still owe for the car and its value will begin to even out. At that point, you can drop your gap coverage. 

Newer vehicles depreciate faster, so you probably won’t need gap coverage if you’re buying a used car. But ask your agent before insuring your new ride. 

Calculating Costs vs. Benefits: Is Gap Insurance Worth It? 

Gap insurance is very affordable. If you add the coverage to an existing auto policy, it might add another $20 to $40 to your annual cost. It might be a couple hundred dollars or so if you buy the coverage separately. These are only rough estimates. Your actual cost can vary, depending on the sticker price and age of your vehicle, the amount you’ve borrowed and still owe, and other details. 

Also, keep in mind that you’ll only pay for gap insurance until you’ve built enough equity in your vehicle that it will offset its ACV if it’s lost, totaled, or extensively damaged. 

Now compare this with the thousands of dollars you might have to pay your lender if your vehicle is lost to you before you’ve built this cash value. For a few extra dollars, having gap insurance can be a no-brainer if you’re buying a new or expensive vehicle. 

Get Covered with Acceptance Gap Insurance 

Do I need gap insurance? Is gap insurance worth it? Before buying a new car, have a quick chat with a trusted Acceptance agent and see if it’s the right move for your bottom line. You’ll find it to be a very affordable way to reduce the risk of taking a big financial hit if your new car or truck is totaled while you still have negative equity on it. 

Simply call Acceptance Insurance at 877-405-7102 or get a quick online quote. You can also find an office near you and discuss your gap insurance options with an expert. 

GAP Insurance FAQs 

Here are some quick answers to commonly asked questions about gap insurance. 

Can Gap Insurance be Purchased After Buying a Vehicle? 

Yes, for about 30 days, but before the car is titled. But be careful with that strategy. Remember, the purpose of gap insurance is to protect the vehicle when it still has that new car smell. In other words, you need gap coverage most when you have little equity in the vehicle and still owe your finance company a lot. So buy your coverage as soon as possible after it comes off the lot. 

How Does Gap Coverage Work in the Event of Total Loss or Theft? 

In those cases, you no longer have a vehicle — but you still have car payments to make. Your insurer pays your claim with a check to your lender for the vehicle’s ACV. If that amount is less than what you still owe, your gap coverage kicks in. 

Keep in mind that if your car is stolen but returned in a few days with minimal damage, your gap coverage probably won’t come into effect. That’s because if the total damage falls far below what the car is worth, your insurer will handle the claim under your comprehensive coverage (minus your deductible, of course). 

Do You Really Need Gap Insurance if You Have Full Coverage? 

Only in the outlined situations in which, due to depreciation, the value of your vehicle drops to a dollar figure below what you still owe on it. If your car is lost, heavily damaged, or even totaled, your insurer will never pay more in claims than what the vehicle is currently worth. 

Is Gap Insurance Needed on a Leased Vehicle? 

Yes, in many situations. Many lenders require that you carry that coverage so they won’t take a loss on a stolen or totaled vehicle. Keep in mind that you make car payments on a leased new vehicle just as you’d do if you bought the car, so the financial arrangement is similar. You might need coverage on a leased vehicle in the same circumstances in which you’d need the policy for a vehicle you bought. 

Is Gap Coverage the Same as Loan Payoff Insurance? 

No. Loan/lease payoff insurance can cover up to about 25% of the amount still owed if your car is stolen or totaled. Gap coverage, on the other hand, will pay the entire difference between what the vehicle is worth and what you owe — including your deductible — in the same situations. 

Does Gap Insurance Cover Negative Equity? 

Yes! “Negative equity” is a fancy term for when the amount your car is worth, minus what you still owe for it, is less than what your insurer says is its current book value. In other words, you’re upside down on your loan. You owe more than what the vehicle is worth if you would sell it.