Imagine that you finally buy the brand-new car you’ve had your eye on for months. But the very next day, the unimaginable happens—you get into a car accident that completely totals your new vehicle.
You receive more bad news after talking with your auto insurance company: the claims agent informs you that you’ll only receive $30,000 for your loss—the cash value of your vehicle—not the $40,000 you paid for it just yesterday.
Jump ahead to these sections:
- Does Gap Insurance Cover Death?
- What Does Gap Insurance Typically Cover?
- What Does Gap Insurance Typically Not Cover?
- When Is Gap Coverage Recommended?
- Getting Gap Insurance Through Your Dealership or Lender
- How Much Does Gap Insurance Cost?
- Alternatives to Gap Insurance
If you don’t have gap insurance, you’re looking at a loss of $10,000. That’s the “gap” between what you paid for the car and what your comprehensive insurance policy is willing to cover. If you financed your car purchase with a loan, that means you still have $10,000 to pay off on your auto loan, even though you no longer have the car.
If you do have gap insurance, the gap policy will make up much—if not all—of that difference. But what about other costs associated with a major car accident? Would your gap insurance pay out a death benefit if you were fatally injured in that collision?
The simple answer is no: gap insurance doesn’t cover owner or driver death. Below, we’ll go into detail about what gap insurance does and doesn’t cover in this kind of situation.
Does Gap Insurance Cover Death?
Some car insurance policies pay out a death benefit if the owner dies in a collision or auto accident, similar to life insurance. But gap insurance does not cover death.
Gap insurance only pays the difference between the value of the car at the time it’s totaled or stolen and the balance of your auto loan or lease. You usually need to purchase collision and comprehensive coverage in order to buy gap insurance.
What Does Gap Insurance Typically Cover?
Gap insurance covers the difference between your car’s cash value and what your comprehensive insurance policy pays if your car is stolen or totaled. Gap insurance is usually optional.
Using the scenario above, if you had gap insurance, the insurance company would pay you $10,000 to cover the difference between the value of your car and the balance of your loan. Your comprehensive coverage would pay you the $30,000 that the car was worth when it was totaled.
Gap insurance for lease or finance agreements
Gap insurance works similarly whether you lease or finance your automobile. Because of rapid depreciation (which happens immediately after you take a brand-new car off the lot), the market value is going to be much lower than the amount remaining on your financing or leasing agreement.
There are some important things to know about gap insurance if you lease or finance your vehicle:
- Many leasing agreements include gap insurance by default, sometimes without telling you. Before you go out on your own and buy gap insurance, check your contract to see if it’s already included by the dealership, the leasing company, or the insurance company.
- You can purchase gap insurance after your lease start date.
- If you lease or finance your car, the dealership will usually require that you have comprehensive coverage. Once you’ve purchased these, you can then add gap coverage.
- Your deductible is usually not covered by gap insurance, although some plans include deductible coverage. Check with your provider if being able to pay your deductible is a concern for you.
- If you file a claim under your gap insurance coverage and are waiting for a check so you can get a new car, you’ll need to be patient. Your claim will first have to be settled entirely before payment is made to you. In the meantime, you’ll need to continue making your lease payments as scheduled.
Gap insurance if your car is stolen
Gap insurance can cover theft, but only if the vehicle is declared a total loss. There are two ways this happens:
- Your vehicle is recovered with enough damage done to it that the insurance company declares it a “total loss.”
- Your vehicle is stolen and never recovered. Note that insurance companies usually have a waiting period to allow sufficient time for your car to be found.
Every insurance company handles things differently. Though most gap coverage includes theft, check with your insurer to see how stolen vehicles are addressed.
What Does Gap Insurance Typically Not Cover?
If you total your car or it’s stolen, gap insurance can be a financial lifesaver. But there are many things gap insurance does not cover. These include:
- Inability to make your car or lease payments due to financial hardship
- Vehicle repairs and maintenance
- The loan balance from a previous car you were financing or leasing that you might have rolled into your new car payment
- Rental car costs while your car is in the shop or while you’re waiting to buy a new car
- A down payment for a new vehicle
- The reduction in value of a non-totaled vehicle after an accident
- A vehicle’s value or loan balance if it’s repossessed
- Extended warranties added on to a car loan
When Is Gap Coverage Recommended?
There are certain instances where gap coverage is recommended. These include:
- If you’re financing your vehicle for 60 months or more
- If you’re leasing your vehicle
- If you put down 20% or less of the purchase price when you bought the vehicle
- If you rolled negative equity from your old car loan into your new car loan
- If you drive more than 15,000 miles per year
- If the car you bought has an above-average depreciation rate.
Concerning depreciation, the average car depreciates by 30% within the first year. After three years, this drop in value could exceed 50%. This may influence your decision on whether or not to buy gap insurance.
Getting Gap Insurance Through Your Dealership or Lender
When you buy gap insurance through the car dealership or lender, gap coverage becomes part of the loan, and you’ll be paying interest on your premium each month.
To avoid paying interest, it’s recommended that you buy gap insurance through the company you insure your auto with. You’ll generally only need gap insurance for a few years, until the gap between what you owe and what the car is worth becomes smaller. Not every auto insurer offers gap coverage or offer it in all states. You may have to switch companies to get it.
Occasionally you’ll find a lender that requires gap insurance, though it’s rare. If they do, ask to see where it’s written in the contract. You may find out that you don’t need to buy gap coverage, but your lender or car dealer will almost always require you to purchase comprehensive and collision coverage.
Some dealerships automatically include gap insurance if you lease your car from them, so be sure to check your loan or lease agreement to see if it is a stipulation of the contract. Even if it is, you don’t have to buy gap insurance from your dealer or lender; you can get it from another provider of gap coverage. If the dealer has already written it into the contract, ask them to remove it.
How Much Does Gap Insurance Cost?
Gap insurance purchased through an auto insurance company is reasonably priced. This is typically between $20 to $40 per month, or a larger one-time payment. Your gap premium will depend on individual factors, such as your car’s value.
Some lenders offer gap insurance for a flat rate of $500 to $700 but it can be purchased for as little as $300.
Considering the potential benefit you could receive from your gap policy gap insurance is often a good value.
Alternatives to Gap Insurance
Gap insurance isn’t the only choice you have to protect yourself financially if your car is totaled or stolen. Alternatives include:
- Loan/lease payoff
- New car replacement
- Better car replacement
Let’s look at each of these.
Loan/lease payoff
Although some insurers use the terms gap insurance and loan/lease payoff interchangeably, they are different in a couple of key ways.
First, gap insurance is only available when you purchase a new car, but loan/lease payoff is often available for used vehicles.
Additionally, loan/lease payoff pays a set percentage of your vehicle’s value, often around 25%, instead of your debt balance.
New car replacement
This is a better choice for someone who is worried more about purchasing a new vehicle than paying off their old one. New car replacement coverage will help pay for a new car of the identical make and model of the old car, minus the deductible, to replace a vehicle.
Some insurers offer both new car replacement and gap insurance coverage, but most only offer one or the other. New car replacement is usually only offered on newer vehicles.
Better car replacement
This offers to replace your old car with a “better” car for those that don’t have a new car and can’t buy new car replacement or gap insurance.
For example, one nationwide car insurance company will pay for a vehicle that is one year newer and has 15,000 fewer miles than your totaled car.
Final Thoughts on Gap Insurance
Gap insurance doesn’t cover death, and you’re under no obligation to buy it. But you may wish you had it if you have to pay out $10,000 or more to pay off or replace your vehicle after a total loss accident or theft.
Though you may hesitate to buy gap insurance because you feel you can’t afford it after buying your new vehicle, consider how costly it would be if you didn’t have it and were involved in a serious accident. If you have a large sum of money in a bank or investment account, gap coverage may not be necessary.
If you want death coverage with your auto insurance, you’ll have to seek that out in a comprehensive car insurance policy.