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When Gap Insurance is a Worthwhile Purchase

By Aaron Crowe
Unless you buy a Corvette that’s likely to appreciate, you could find yourself owing more on your car loan than the vehicle is worth after an accident.
That’s because the average new car loses 11 percent of its value the moment you drive it off the dealer’s lot, according to During the first five years the car depreciates by 15-25 percent each year.
If your car is totaled, your car insurance company is only going to pay you the current value of the total loss car , not the original purchase price. If you owe the bank more than that,you still have to pay the loan.
Gap insurance could fill that hole.What is Gap insurance? It covers the difference between what your vehicle is worth and what you owe. Gap coverage provides protection when a total loss might lead to two car loan payments.

How does gap insurance work

if you owe $20,000 on your car loan and the vehicle only has a Kelley Blue Book value of $15,000, your regular auto insurance will only cover up to the $15,00 and Gap insurance would pay the remaining $5,000 says Ashley Harris, a vice president of corporate communications.

A real-life gap insurance example

Harris knows first-hand the importance of gap insurance.Two years ago she bought a 2013 Lexus.After only two months, she was in an accident and the car was totaled.
She owed about $37,000 and the car was only worth $32,000. But because she had Gap insurance, she didn’t have to come up with the $5,000. Harris filed a claim and within two weeks “my auto was paid in full” she says.
Harris has a friend who didn’t have Gap insurance when the vehicle was totaled. It was valued at $17,000, though he owed $23,000 on the car loan. His insurer paid him the $17,000, and he paid was left to pay the $6,000 difference, she says.
“When he finally decided to get a new vehicle he was going to have two auto payments until his totaled auto was paid off in full,” Harris says.

Costs of Gap insurance

A car dealership is one place to buy Gap insurance. But they don’t have to buy it from the dealer, and they don’t have to buy it immediately, says Paul Nadjarian founder and CEO of Mojo Motors.
“The dealers do a good job making you feel you need it when you get a car,” Nadjarian says.It is often required for some purchases nationwide.
Dealers often charge more than your insurance company or credit union for the same Gap insurance policy.
“All Gap policies are the same no matter what the dealer tells you,” Harris says.A dealership will usually sell Gap insurance for $700 to $1,000 for the life of the loan, versus $200 to $400 at a credit union, Harris says.
Theft is covered by Gap coverage, but it doesn’t cover deductible costs. You still have to pay your deductible even in the case of a collision. Also, only damage to vehicles in a collision is covered, not bodily injury.
To collect on a Gap policy, you’ll need to show the Gap insurer documentation from an auto insurer that includes the amount they’re paying, says Thomas Simeone.
“It is important that you keep making monthly payments on your car after an accident and until the note is fully paid off,” he says.
The Gap insurer will want documentation from the lien holder that the insurance proceeds are less than the amount owed, he says, and then it will pay the lien holder the balance. “You will not see any money, but the loan will be paid in full,” Simeone says.

Other ways to cover yourself

If you buy Gap insurance from a car dealer, the cost can be rolled into the loan and you won’t see much of an increase in the monthly payment. Check the terms with your insurer to see your options.
Gap insurance often isn’t needed after three years once enough equity is accumulated. Instead of buying Gap insurance, one option is to take that savings and put it aside in case your car is totaled says Dan Young, senior vice president at Carstar.
The average age of a car on the road today is 11.5 years, Young says, so many owners probably don’t need Gap insurance. But if they do, they should consider how they’d pay for that gap if their car is totaled in a collision.
“How much of this risk can I absorb myself if something happens to my car?” Young asks.
Another option is to put a large enough down payment down when buying so that the loan is reduced to the Blue Book value or below Simeone says.

When to get Gap insurance

Most people aren’t disciplined enough to put money aside for such a payment, Young says, and Gap insurance would work for them in the three years after.
Another time when it makes sense to buy Gap insurance is if you have bad credit and have a high interest rate on your car loan, Nadjarian says.
If you’re financing a car with a minimal down payment or you have little to no equity, Gap insurance could save you thousands of dollars, says Todd Balderson, owner of Balderson Insurance Agency.The coverage is also frequently recommended for people leasing.
Some lease agreements also require Gap insurance, says Balderson, who recommends contacting your insurance agent for advice on recommended coverage.It is often required nationwide for leasing.
Gap insurance is best for people who don’t have the down payment money and can’t pay the gap if their car is totaled, says Simeone.
“If you have the money, either put it down or know that you will have to pay a gap if you have an accident,” he says.
The good news is that if you do need Gap insurance, you’ll probably only need it for three years or so. It’s a matter of deciding if you want to take the risk.
“It doesn’t happen that often,” Nadjarian says of having to use Gap insurance. “But when it does happen, it’s painful.”
Is Gap insurance worth it? The answer depends on your car and financial situation. Gap coverage especially helps protect drivers who are financing or leasing in the case of a total loss. If that’s you, Gap insurance can provide the protection you need.
Aaron Crowe is a journalist who covers the auto industry for

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