Gap Insurance Coverage and How It Works

The old saying was that a new car “loses a thousand dollars in value as soon as you drive it off the lot.”  That used to be true, but these days a vehicle is likely to lose a lot more than just a thousand dollars of value when you “drive it off the lot.”

Some studies have found a new car can lose up to 10% in value almost immediately and lose up to 30% in value over the space of a year, depending upon the vehicle type.

Where this can put us into a bind, however, is where we’ve purchased the vehicle on loan with only a minimal down payment applied.  That $30,000 new purchase that gets totaled a few months later may only bring $25,000 in fair market total value reimbursement from an insurance company – but we still owe $27,000 on the loan.  Who pays the $2,000 difference on the loan?  We do!

This is where “gap” insurance comes into play – it is used to cover the difference on a car loan (or lease) between what we still owe on our contract and what the market value total reimbursement could be if the vehicle is totaled in an accident or as the result of a comprehensive claim for theft, vandalism, weather damage, etc.

Gap insurance is optional insurance that you can add to a vehicle.  It generally requires that you already have comprehensive and collision coverage in place.

Whether or not you need gap insurance is first a question of your personal financial situation and second a question of applying some math.  In general, you would want to at least consider gap insurance if:

• You will owe more on your car loan or lease than the car’s likely value if totaled due to damage or if stolen. This is especially likely to be the case on purchases where you have made only a small down payment. Most of the vehicle cost is financed on a loan, and more so on longer-term loans where the earliest payments are mostly going toward interest than paying down loan principal.  Take a look at the current resale value of the same car model from a year or two back and compare it to the original total purchase cost of the vehicle.  How much is the fair market value dropping over time?  Then compare that with the loan payment schedule on your new car and see how much principal you will still owe on the loan at six months, one year, and two years out.  Are you likely to still owe more on the loan than the vehicle is likely to be worth?  If yes, then gap insurance is worth considering.
• If you are likely to owe more on your car loan or lease than your car is likely to be worth during the duration of the loan or lease, can you afford to cover the difference out of pocket? If not, then gap insurance may be a good idea.
• Is your vehicle a popular model for car thieves? There are many annual lists published of the “most stolen vehicles,” They typically list stolen vehicles by simple totals.  This tends to skew the results toward vehicles that simply have more units on the roads.  A useful annual list from the Insurance Institute of Highway Safety breaks down the reporting by “frequency” -- that is, which vehicle types have the highest rate compared to the number on the road of being stolen rather than just the largest total numbers.  As we might expect, the thieves’ targets tend to be higher-end sports cars, sedans, SUVs, and pickup trucks.  If you have a vehicle of this type and answered “yes” to the two points above, this is one more reason to consider gap coverage.  The “popular” targets for 2020 include:
  • Honda Civic
  • Honda Accord
  • Ford Pickup (Full-size)
  • Chevrolet Pickup (Full-size)
  • Toyota Camry
  • Nissan Altima
  • Toyota Corolla
  • GMC Pickup (Full size)
  • Dodge Pickup (full size)
  • Jeep Cherokee/Grand Cherokee

If you are shopping for gap insurance, be aware that there are many variables in coverage.  The amount and cost of coverage can vary considerably, and some insurance companies – even some major insurers – simply don’t offer this type of coverage.  There is no requirement that they do so.

If your current auto insurer doesn’t offer gap coverage or doesn’t offer an attractive package, many dealerships or their in-house financing companies may offer gap coverage as well.  Read the details and do your research – these coverage packages vary in quality.

And be aware that if you have purchased a term gap coverage policy, you can generally (but not always) cancel it early if you decide you no longer need the coverage.  And you can generally (but not always) get a pro-rated refund of a portion of the premium you may have paid if you cancel a term gap policy early.  Again, read the details.

If you already have a collision or comprehensive claim underway through your own insurance company, they will already be looking at a gap coverage claim for you.  If you are working with the property damage liability insurance for a negligent party who caused your vehicle damage, then you may want to consider just presenting a collision claim to your own insurer.

They are not likely to value the vehicle much differently from one another, and the overall claims process is likely to be faster just going through your own insurance.  But if you try to resolve your property damage through another driver’s insurance, then your own insurer will need to be kept in the loop to handle your gap coverage claim.

Your insurance will also need the contact information and account number for your auto loan or leasing company so that they work with them on paying off your loan or lease.

Unfortunately, in these situations, you won’t be recovering anything in your pocket for your vehicle damage since all the payments will be going to your auto loan or leasing company to pay off the balance of what you owe.  But at least you won’t have to be paying thousands of dollars out of your own pocket.

The video below explains more about how gap insurance coverage works.

For more information on the insurance coverage you may have on your automobile insurance policy, see the links below:

• Collision coverage 
• Comprehensive coverage 
• Liability coverage 
• Uninsured motorist (UM) coverage
• Underinsured motorist (UIM) coverage
• Medical payments (med-pay), insurance
• Umbrella insurance coverage