Gap Insurance and What It Is

Gap insurance covers the difference if a total loss occurs and your vehicle has depreciated to the point where it's worth less than what you owe. More clearly, if you have a loan or a lease, your car will lose 20 percent of its value within the first year—sometimes even the moment you drive it out of a dealer lot. If you didn't put down a 20 percent down payment, this means your car is worth less than what you owe at the end of the first year. If you happen to total your car within that first year, and it is deemed a total loss, your insurance company will compensate you for the fair market value of the car. Often times the fair market value of your car is less than your remaining debt. There is a gap between the two numbers, hence gap insurance, which covers that difference should a total loss occur.

Gap insurance covers your remaining debt if the car is declared a total loss for whatever reason. Reasons can include: fire, traffic accident, theft, flood, tornado, hurricane, vandalism. Sometimes it will even act in place of an insurance policy.

Here are some common exclusions: 1. Cars that were not covered by both comprehensive and collision insurance. 2. Non-factory installed equipment on the car. 3. Previous debt that was rolled into the existing car loan, such as from trade-in cars that still had unpaid debt, or leased vehicles. 4. Costs for other products that were added to the loan or lease, such as extended warranties. 5. Delinquent payments on loans or leases. 6. Penalties added to the debt, or security deposits on leased vehicles.

Well, that's for you to decide. If your car is loaned or leased, then it may not be a bad idea. It could save you thousands of dollars should your car be declared a total loss. You only need gap insurance so long as your car is worth less on the market than your debt. Once your car has enough equity, you no longer have to buy gap insurance. Prices for gap insurance range anywhere between $300 to $700.