What Is Gap Insurance and When Do You Need it?
There are many different types of car insurance, and you can get varying types of coverage depending on what situations you will be in. From rental car coverage to collision-only coverage, you want to ensure that you are getting the type of coverage you need.
Have You Ever Heard of Gap Insurance?
Some drivers are not aware of this critical type of insurance coverage even though it can be a beneficial financial protection. Today, learn more about gap insurance so you can determine if this is something that you should add to your insurance package now.
What Is Gap Insurance?
Gap insurance is a type of optional car insurance coverage used by drivers who have an auto loan on their car. In cases where your car is totaled, stolen, or otherwise damaged beyond repair before you pay off your auto loans, you might end up owing more than the value you will get from an insurance claim.
This is where gap coverage would come in.
Gap coverage, also known as guaranteed asset protection or loan gap coverage, helps to cover the “gap” between those numbers. If you don’t have this type of optional protection, you could end up owing money on a loan for a no longer-operational car, and that’s not a situation that anyone wants to be in.
When Do You Buy Gap Insurance?
You have to buy gap insurance when you initially take out an auto loan or lease a vehicle in most cases. You can usually also buy it within the first few months of owning the car, but the value covered may be slightly less.
Ideally, you should get gap insurance when you get your new vehicle. By doing this, you ensure that your gap coverage reflects the new car value of your car rather than the depreciated value that will apply as soon as you leave the dealership lot.
Most car insurance companies will not offer gap coverage on vehicles older than two or three model years. This is due to the risk factor and the simple fact that gap coverage would not typically be needed in this situation.
When You Need Gap Insurance
The only time that gap insurance coverage is going to be useful is when you have an auto loan or lease out on a vehicle you are currently driving. Until you pay the car off in full or the lease period ends, you will always be carrying some amount of extra risk.
If you total a car that you still owe money on, you will still owe that money. Regardless of whether the vehicle is driveable or not, the lender will expect the full amount to be paid off.
Have you ever worried about what will happen if you end up in this tough situation? You can protect yourself with gap insurance.
Required By Lenders
There are also some situations where an auto lender or the dealership that you lease a car from is going to require you to have gap coverage. Due to the risk they are taking in financing your new vehicle, lenders will expect you to live up to that financial commitment. They might ask you to prove this commitment by getting some type of gap insurance.
Some lenders may offer this type of insurance as part of the package when you buy or lease a vehicle, even if it is not required. Consider shopping around before committing to their gap insurance rates, as they are often priced at a premium. Many drivers feel they must use their lending company’s preferred insurance, but that is not true.
Should You Get Gap Insurance?
Now that you know more about gap insurance, you’re probably wondering if it is a good fit for you. Even knowing how it is typically used, it can be hard to discern if that means that this optional insurance coverage would make sense for your life.
Here are some simple steps that can be useful for determining if you should use gap insurance coverage:
- Is your auto loan period longer than 60 months? Gap insurance is a good idea if so.
- Did you put a down payment of less than 25% on your vehicle? Gap insurance is a good idea if so.
- Does your lease agreement already include gap insurance? If so, you likely don’t need to add additional coverage.
By working through these three quick bullet points, you should have a better idea of whether your current car situation is suited to gap insurance.
Other Short-Term Coverage Options
Getting temporary car insurance that adds any coverage you are missing is also an option for car owners. If you are planning to switch car insurance carriers but haven’t got a new plan yet or only want to drive a car for a short period, temporary insurance can help make you and your vehicle street legal.
Temporary car insurance is often more expensive than long-term plan commitments, but it can help to save you from the stress of not having car insurance at all. In that respect, it is worth it to invest in this type of coverage when it is needed.