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What is Gap Insurance, How Does it Work, and Who Needs It?
October 9, 2024
The moment you drive a new car off the lot, it starts depreciating in value. In fact, many new cars face a 20% value drop within the first year of purchase. While this doesn’t always spell trouble, if you financed your vehicle and your car gets totaled, there could be a discrepancy between what you paid for the vehicle and what’s paid back to you by your insurance. That’s why gap insurance is so important. Here’s what you need to know about what gap insurance is, how it works, what it covers, and who needs it.
What is Gap Insurance?
Also known as Guaranteed Asset Protection, gap insurance is supplemental auto coverage that pays out the difference between what you owe on your car loan and the amount the insurance pays in the event of a total loss claim. As a supplemental coverage, it works in tandem with collision and comprehensive car insurance for additional protection in the event of a covered peril. While you can often buy this coverage directly from the car dealership, it’s often more affordable to buy it from an insurance company.
How Does Gap Insurance Work?
New vehicles start depreciating in value the moment they leave the lot. So, while your car may be worth $30,000 when you buy it, if it was totaled in a covered collision, your collision insurance would only pay out the totaled car’s depreciated value. In that case, if you still had $25,000 in auto loans, and the car’s depreciated value was deemed to be $20,000, your gap insurance would cover the $5,000 discrepancy to settle the loan. Without it, you’d be personally responsible for making up the difference.
What Does Gap Insurance Cover?
As a specialized, supplemental coverage type, auto gap insurance covers only the difference between your vehicle’s total value, as determined by your insurance company after a total loss claim or theft, and whatever is left on your auto loan or lease.
Do I Need Gap Insurance?
It depends. If you buy your car in cash, for example, there’d be no reason for you to buy gap insurance, as there’s no financing gap to cover. While you’ll want to reach out to your independent insurance agent to discuss your unique situation, people who made less than a 20% down payment on their vehicle or who have an auto loan that is 60 months or longer should likely consider gap insurance, as should anyone who’s leasing a vehicle.
Looking for auto insurance from one of America’s best insurance companies? Contact one of our independent insurance agents today to learn more about our car insurance coverage in California, Colorado, Idaho, Oregon, Washington, and Wyoming. In the meantime, check out our blog about why car insurance total loss claims are on the rise.
The content available via Grange.com is for informational purposes only and may not be used for any other purpose. Content provided or expressed on Grange.com, including that of third parties, may not reflect Grange Insurance Association’s (GIA) policies or conform to any agreement you may have with GIA and its subsidiary companies. Please contact a licensed insurance agent to obtain particular advice.
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