Is Gap Insurance Worth It?
Buying a car is a major purchase, which is why auto insurance is so vital to protecting the financial commitment you make when you buy or lease a vehicle. Financing a vehicle is an option for buying a car that you can't afford to pay cash for, but it also means that you can end up owing more than your car is worth. Gap insurance pays this difference in the event of a major accident or theft.
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Function
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Gap insurance pays for the difference between what your standard auto insurance policy says your car is worth and what you owe on your auto loan. This means it's valuable for drivers who are upside-down in their loans and owe more than their vehicles are worth.
Gap insurance only applies in situations where the vehicle is entirely lost, as with a theft, or involved in an accident that results in damage that would cost more to repair than the value of the vehicle prior to the accident. Gap insurance can be useful regardless of whether you're at fault in an accident, since both your insurance and the other driver's will only pay up to what your car was worth before the accident.
Types
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Gap insurance comes in several varieties. Most gap insurance isn't actually insurance at all; instead, it's a debt cancellation agreement, known as a gap waiver, written into your auto loan. Gap insurance comes from an insurance company, which may or may not be the same company that provides your regular auto insurance policy. Finally, a gap endorsement is a rider that your primary insurer writes into your existing policy. You can add or remove gap insurance at any time, though car dealers may only offer a gap waiver at the time of purchase.
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Cost
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Compared to other forms of auto insurance, gap insurance is relatively inexpensive. According to the financial website Bankrate.com, insurance companies compute the cost of gap insurance as a percentage of a driver's collision and comprehensive insurance premium. For example, a typical $1,400 annual auto insurance premium might make that driver's gap insurance cost between $20 and $30 each year. It also means that any driver who ever needs gap insurance is likely to receive a much greater benefit than what the insurance cost to purchase.
Value
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The value of gap insurance is different for each driver. If you don't owe more than your car is worth, there is no gap and gap insurance is entirely unnecessary. This may be the case if you make a large down payment or finance your vehicle over just a few years. Car buyers who finance over extended periods, make low down payments or buy vehicles that depreciate quickly, such as sports cars or luxury cars, stand to gain more from gap insurance.
To determine what gap insurance will pay you should you need it, look at the total payoff amount on your next auto loan bill. Compare this to a reliable estimate of the car's fair market value, such as the value listed in the Kelley Blue Book. If the difference between the two amounts is more than you can afford to pay, gap insurance may well be worth it.
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