Are you wondering how to know if you have gap insurance? If yes, you are in the right place as here we will discuss all you need to know about gap insurance and how to find out whether you are protected. But first, it is important to have a knowledge of what gap insurance is.
How do you know if you have Gap Insurance?
Gap Insurance is a type of insurance that covers the difference between the actual cash value of a vehicle and the amount owed on the loan or lease. Gap insurance can give you peace of mind knowing that you won’t be stuck with a large debt if something happens to your vehicle.
Moreover, this can be helpful if the vehicle is totaled in an accident or stolen, and the insurance payout is not enough to cover the balance of the loan or lease. That said, let’s get into it!
Purpose of a Gap Insurance
The purpose of gap insurance is to cover the difference between the covered amount on the policy (which amounts to the money you would get – minus deductible – if the car was totaled) and the actual cost to pay off the loan or lease on the vehicle.
Once the car is a few years old, and you’ve been paying on it, the actual total owed on the vehicle loan will be less than what the car would be worth on the market, which is what your insurance covers you for. If that’s the case, you no longer need “gap” insurance as there is no gap to cover.
Your insurance agent is the best one to tell you if you still need it, or if you don’t have it and you need it, how to get it. You do not want to buy or lease a new car without it, otherwise, you could easily be in a position where you owe thousands more than your insurance would cover.
When you might need Gap Insurance
Gap insurance is almost always a good idea, but sometimes it’s necessary. Here are the top situations where you should have gap insurance.
- You made less than a 20% down payment
- You’re financing for 60 months or longer
- Purchased a vehicle that depreciates faster than the average
- Rolled over negative equity from an old car loan into the new loan
In the case of a lease, you always want gap insurance. It’s so important many dealerships actually require the insurance. If you want to make sure you don’t lose money when engaging in mandatory gap insurance, put as much money down as possible.
By paying a high down payment, you absorb the loss in value from the beginning. This will result in lower lease payments.
When you don’t need Gap Insurance
You don’t always need gap insurance. Like the example above, once you have paid a certain amount as a down payment you don’t have to worry about a gap between the actual value and the value of your lease vs. the value when the vehicle was leased.
The only other time you don’t have to worry about gap insurance is when your dealerships make it mandatory. If that’s the case you don’t have to make a decision about whether or not to get the insurance. But, if you know you don’t want it, you may have to shop around from a dealership that doesn’t make it mandatory.
Where you can get Gap Insurance
You can get gap coverage from your insurer or the dealership of your vehicle. Just bear in mind that it typically costs a lot more at dealerships and yours may ask you to pay it all upfront.
Many insurance companies will offer a variant of gap insurance called loan/lease coverage. It’s usually less expensive than gap insurance, but it provides a certain percentage of your car’s actual cash value, which may or may not be enough, depending on how much you still owe.
How do you know if you have Gap Insurance?
In most instances, Gap Insurance is provided by the lender and not your auto insurance carrier. Usually you see it more on leased vehicles. You can call and ask the leasing company or your lender or you can go through your loan paperwork to confirm if Gap insurance was included.
If it’s on an auto policy, it would be added as an endorsement so check the endorsements listed on your policy. That said, here are three (3) different ways you can know if you have a Gap Insurance:
- You purchased it stand-alone (in which case you’d surely already know you have it, so we can rule this one out)
- You purchased it as an optional coverage enhancement with your auto policy, so either call your agent and ask, or spare them the interruption and check your policy documents or recent billing statement yourself (a quick “tell” might be that if you don’t carry both collision and comprehensive coverage, you can be confident that you do not have gap coverage, as carriers generally won’t offer it in the absence of the other two)
- You opted into it when you financed the vehicle purchase, so check your loan or lease agreement – the description of it is probably something other than “gap insurance” but if it’s there it should appear as a line item, probably an amount somewhere north of $200 (and maybe well north of that)
Frequently Asked Questions (FAQs)
How old can a car be to get Gap Insurance?
To qualify for gap insurance, you usually have to purchase a policy within three years of buying your car. Your vehicle can be preowned but typically has to be no more than two to three years old.
Can I buy Gap Insurance for my new car?
You can buy Gap insurance for your new car(s) if you are worried that the depreciation value is more than the car is worth, and if the vehicle is totaled, the insurance compensation is less than the loan value.
In this case, the gap insurance will cover. Unless you are buying the used car and financing it from a high-interest dealer, your loan should not be more than the vehicle’s value.
Will Gap Insurance help me get a new car?
Was your previous car totaled? If so, yes, Gap insurance will help you buy a new one, in so much that Gap insurance will help pay off your old/totaled car. If you’re not asking about a previous car, but just about a new car, then no, Gap insurance has nothing to do with that.
Why do I need Gap Insurance on my car when I have full coverage?
You may need it when the amount of a vehicle loan is greater than the value of the vehicle, or it is likely that will happen in the future. In other words, the value of the car vs. the amount of the loan is upside down, sometimes called underwater.
Does Gap Insurance ever make sense on a used car?
Yes, if you’re purchasing with a loan and no cash down it makes sense. Your car is going to depreciate most likely faster than you’ll be paying it off with interest.
If you get into a wreck and you owe $12,000 and the insurance company deems your car worth $10,000 then you are on the hook for the additional $2,000.
That means you’ll still have a payment on the balance owed for a vehicle you can’t drive while you still need to finance another vehicle. A good percentage of car buyers owe more than what their car is worth. In other words, you leave yourself at great risk without gap insurance.