Gap Insurance 101

Gap Insurance 101If you're like most people, you either financed your new vehicle with a loan or are leasing it. There's nothing wrong with either of these situations - most of us don't have tens of thousands of dollars to plunk down for a new car or truck, after all, but, especially with leases, you could be leaving yourself open to an unplanned insurance liability.

When you finance or lease a new vehicle your loan, or the total of you lease, are based on the purchase price of the car, but your insurance is based on the value, and cars and trucks begin to depreciate, or lose value, from the moment they leave the lot. Most of the time, this isn't a problem, but if you were to be in a serious car accident within a few months of getting your new car, you could find yourself in a position where the insurance payout - based on the value of the vehicle - isn't enough to pay off the loan or lease contract on the car.

This is why Gap Insurance exists. Its special auto insurance that covers the gap between what your car is worth (the value) and what you owe on it (the loan or lease amount). For example: you buy a vehicle with a lease or loan amount of $20,000. Most experts agree that a car depreciates by 20% as soon as you take it home, so if you were to get in an accident where the vehicle is a total loss just two weeks later, the insured value would only be $16,000, and you'd be short $4,000 to pay off the loan, unless you had gap insurance.

So, how do you know if you need Gap Insurance? It's never a legal requirement, but it's a good idea if:

  • Your car is leased, in which case it may actually be part of the lease contract that gap insurance is required. In some cases, it's even included in your monthly lease payment.
  • If the down payment on your vehicle was less than 20% of the purchase price.
  • If your loan term is 72 months, or longer.
  • If your new vehicle is likely to depreciate quickly, as most luxury cars do.

If you fall into any of these categories, you should contact your regular auto insurance company first, in case they sell gap policies and can offer a discount. If not, ask your lender or lease company for referrals, but, just as with any other kind of insurance, be sure to get more than one price quote before you make a decision.