What Is Gap Insurance?

No matter how much you love your car, it starts depreciating from the very instant you bought it. An average car loses about 20% of its value in a year. What’s more, whether you buy or lease a vehicle, you might end up in an unpleasant situation when the car is badly damaged or stolen and you somehow owe more money than your standard auto insurance covers.

How come? Well, the standard auto insurance policy covers the depreciated value of a car – that is, the value of a car at the time of the insurance claim – which may not be enough to cover the full amount you owe. However, that can be fixed with gap insurance, which covers the difference between the actual value of a vehicle and the amount you owe on it.

What Does Gap Insurance Cover?

To better understand how gap insurance works, let’s imagine Joe’s car is currently worth $50,000 while he still owes a total of $65,000 on the contract. Should Joe’s vehicle be totaled or written off, his standard car insurance would cover only $50,000, whereas he would have to pay the rest from his pocket. However, if he had gap insurance, the $15,000 gap would be covered.

The typical situations when purchasing gap insurance may be reasonable include:

  • You bought a car that depreciates faster than other cars.
  • You have long, value-depreciating trips in plans.
  • You leased your vehicle (typically requires gap insurance).

How Much Is Gap Insurance?

Gap insurance can be offered by both card insurers and car dealers, though the former typically charge less. Cost-effective gap insurance may cost you a minuscule $20 annual addition to your car insurance premium.