How Does Gap Insurance Work?

January 8, 2024

New owners who buy a car on credit may need a gap insurance service. This is an additional point of gap coverage auto insurance, covering the difference between the amount from ordinary car insurance and the loan balance if the car is broken or stolen.

How Gap Car Insurance Coverage Works

Lenders require comprehensive auto gap insurance and collision insurance when buying or renting a vehicle for any purpose with a car loan or leasing. If the car is completely broken or stolen before the expiration of the credit period, the person’s obligation to pay for the transport is not removed.

Gap vehicle insurance is typically issued to avoid problems with paying a car loan in case of car theft and difficulties in paying the balance of the amount by the owner. It looks like this:

  • You buy a car and apply for gap protection.
  • There is a 20% reduction in the actual cost of purchased vehicles every year.
  • In the event of car theft, a standard insurance policy will cover the full cost when filing a claim. In other words, the amount is much less than when buying.
  • The insurance gap reimburses the remaining amount on a car loan that was not covered by the policy.
  • The insurance gap reimburses the remaining amount on a car loan that the policy did not cover.

For example, you had $ 14,000 to pay on a loan when an accident or theft occurred. The insurance company has valued your car at $11,000; gap coverage will reimburse the remaining $3,000. In a nutshell, that answers the question, “What is gap insurance for?”

It is important to separate the concepts of the cost of a car at the time of an accident. After the accident, the owner receives a check with the amount for which he could sell the car on the secondary market. This is called the “actual monetary value of the car.” Gap payouts are based on it.

When Car Gap Insurance Is Necessary

Auto gap insurance coverage will be necessary for several situations:

  • The first payment made for the vehicle was less than 20% of the cost.
  • The car is not older than 2-3 years.
  • You are the first owner of the vehicle.
  • Car loan was issued for 60 months.
  • Car loan debt exceeds the value of the car itself.
  • The vehicle loses its price faster than other brands.
  • You spend more time driving than the average person in your area.

Any of these points is a reason for buying gap insurance. Guaranteed gap protection makes sense if the amount of the outstanding car loan exceeds the price of the vehicle. Gap auto insurance coverage is for people who initially invested little money in a car (over a long period, the number of payments will be much higher than the cost of a car) or rented a vehicle.

Gap insurance for a new car is irrelevant when:

  • the initial payment for transport exceeded 20% of the cost of the car
  • a person has an income that allows repaying a loan taken for a period of up to five years
  • a purchased or rented car did not quickly lose value compared to other brands

You can refuse gap insurance for a car loan if the price of a car exceeds the loan debt. You can check periodically online at NADA and Kelly Blue Book how much your vehicle is worth at a particular moment to compare it with the loan balance.

How Do You Get Gap Insurance, and Where Is It More Profitable To Get It?

New car gap insurance is advisable to carry out immediately upon purchase. It depends on the year of manufacture of the car. Many insurers issue a service only for brand-new cars. The conditions of vehicle gap insurance must be clarified with the company.

You can buy gap insurance on a car at a car dealership, from large insurance companies, from a dealer, in companies that sell only gap coverage. At this point, you might be tormented by the question, “How much is gap insurance in each of these сases?”

Here’s what you need to know about the cost:

  1. The most profitable solution is to buy gap insurance on a new car from your insurer. It is important to consider that organizations do not sell insurance gap coverage separately from a standard policy. It comes as a supplement to the car insurance you already have. Taking out a comprehensive policy at StateFarm and having progressive gap insurance is impossible.
  2. Internet services offer to purchase gap cover car insurance for a one-time fee.
  3. When solving the gap covering car insurance, the option with a dealer is the most costly. The seller can automatically include insurance in the car rental agreement in loan payments, and the owner will pay more interest on the cost of coverage during the loan payment period.

It is difficult to resist the dealer when he offers to issue a gap insurance refund right at the parking lot. Remember that centers often charge a flat rate of $500-700 for a gap service. A similar option from a major insurance provider starts from $20, and the difference is obvious.

It is not necessary to stick to one provider when applying for gap insurance for a car. If you already have insurance with a lender and wish to purchase it from your insurance agent, you can remove it from your car loan agreement.

Gap Insurance Cost

Gap insurance providers set the annual cost of gap insurance, which is usually several hundred dollars annually at dealers. When a gap car coverage is a part of the existing comprehensive insurance policy, the annual insurance premium will increase by $30-60.

The insurers determine what will be the size of gap insurance benefits according to several criteria:

  • Brand, cost, and demand of the car in the market
  • Age and place of residence of the car owner
  • Driving profile
  • Expected depreciation of the machine
  • Loan amount (for large loans, gap coverage may be more expensive)

There needs to be more than a simple understanding of what is gap insurance for cars to agree.  It’s better to compare the rates of at least three insurers to find the best company with the lowest annual premium.

When Does Gap Insurance Not Pay Off?

Having figured out what is gap coverage for cars, it is important to understand under what circumstances insurance is payable and when the insurer refuses to pay. All situations concerning the vehicle must be documented.

In case of damage to a movable asset, insurance companies under a comprehensive policy are the first to be involved in the solution. If you have an accepted claim for damages and there is a difference between the outstanding amount for the loan and the reimbursement from the insurer, gap insurance is making up for the missing part. 

When another person becomes the culprit of the car accident, gap insurance also covers the gap between the outstanding loan and the proposed settlement amount. But there are also downsides to this program. The company may refuse to pay in the following circumstances:

  • The car is damaged but not officially recognized as completely broken or lost.
  • The owner has not paid the insurance premium.
  • The company has set a limit on payments under the insurance policy.

With a strong car depreciation, the gap coverage under the above conditions may not cover the loan debt. Therefore, learning what gap insurance covers is crucial before applying.

Companies Offering the Best Gap Insurance Terms

How Does Gap Insurance Work - 2

Not every insurer offers a car insurance gap option. You can contact another organization if your insurance company does not provide this service. Companies offering auto gap insurance at the best conditions are:

The USSA and Progressive insurance companies are considered the most popular in terms of the number of customer requests. USSA is famous for its impeccable reputation, low rates, and comprehensive discount program, including discounts on the following:

  • Safe driving
  • Purchase of a new car
  • Buying multiple vehicles

There are also discounts for students and families for low mileage.

USSA can issue gap insurance for cars or car replacement policy for a new or similar one if the car is unusable after an accident or theft is confirmed. The disadvantage of the insurer is limited access to the service. Only military personnel and representatives of their families can apply for the policy.

The policy from Progressive is in demand among drivers to whom other companies have denied service due to drunk driving and age restrictions (over 65 and under 21) without clear three years of driving experience. It also attracts customers with multi-policy discounts and benefits for several cars. There are programs for students and teen drivers.

The monthly fee is $5 per month. In addition to car insurance gap cover, Progressive reimburses up to 25% of the cost of the car.

Alternative Gap Insurance Options

There are other ways to protect yourself from large financial losses if your car is stolen without car gap insurance coverage.

  • New vehicle replacement policy: If buying a new car instead of a broken or stolen one worries you more than paying off the balance on your car loan, this type of insurance is the best alternative to gap auto insurance. The coverage offsets the purchase of a car of the same make and model, subtracting your deductible from the amount.
  • The best car replacement insurance: After declaring the vehicle lost completely, the insurer pays to aid the purchase of a newer model (of the same brand and with less mileage).
  • Insurance for rent or car loans: You can take out insurance for used cars. If gap insurance coverage applies to new vehicles, this option pays out approximately 25% the vehicle’s value (on top of standard policy and collision payouts).

For the owner to qualify for these policies, his car must have a certain age and mileage. A comprehensive auto policy and collision coverage must also be issued. If the car owner meets the requirements of alternative insurance options, there is no point in applying for gap coverage insurance.

Do I Need to Apply for Gap Car Insurance?

Suppose you become the owner of a new vehicle due to purchase or lease. In that case, the financial situation allows you to pay a large part for the car, and there is confidence in repaying the rest of the loan in 3-4 years – it is not advisable to pay for gap car insurance. A comprehensive policy will cover all possible costs in a collision and theft.
Car insurance gap coverage will require a car loan from the moment it is issued when it exceeds the total cost of the vehicle itself. You can find the price for repairing the vehicle under the definition of “total.” Auto insurance gap coverage is the ability to cover the shortage and not spoil your credit history if the car gets into an accident.

How Does Gap Insurance Work? 2

Oleksandr Rohovnin is a Content Marketer at Phonexa.com and an expert contributor to CoverExplore. His passion is digital marketing, innovative technologies, tech industries, and – above all – distilling vast amounts of complex information into engrossing narratives anyone can relate to. At CoverExplore, Oleksandr stokes passion for auto insurance and the automotive industry in general in every story he curates.

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