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How Does Gap Insurance Work?

Insurance for your car should be pretty straightforward. You buy a car, you insure the car and that should be the end, but that is not always the case. When you finance a car, you end up paying a loan that is higher than what the car is actually worth. Most insurance coverage is based on what the car’s listed worth is, no matter how much you might owe on the loan. That leaves you with what is called a gap.

Should I Have Gap Insurance on My Car?

Before you buy gap insurance, there are a few things that you should know about it. First, determine if you really need gap insurance on your car:

  • Do you have a loan on the car? If the answer is no, you do not need gap insurance.
  • Is the loan on your car new or does it have a high interest rate? If yes, then you may need gap insurance.
  • Is the loan amount higher than what the book value or listed value of your car is? If yes, then you need gap insurance.

Is Gap Insurance Available?

In addition to determining whether or not you need gap insurance, you should also determine if it is available in your area and for your particular needs.

  • Gap insurance is not available through all agents or in all areas.
  • You cannot buy gap insurance if you are financed through a personal seller or have used a home equity line of credit to pay for your car.
  • You cannot buy gap insurance to cover carry over balances when you buy a new car.

Can Gap Insurance Be Your Only Coverage?

Most states require a minimum of insurance coverage. That insurance is meant to protect another person’s vehicle in the event of a crash and does nothing for your own vehicle. To be covered, you need to have a higher level of auto insurance, which may or may not require gap insurance.

Gap Insurance Has Limitations: What It Does Not Cover

Because it is not meant to be a primary insurance, gap insurance actually only covers very little. It is only meant to cover the amount between stated value and actual replacement cost. It does not cover:

How Does Gap Insurance Work

  • Your monthly payments if you are unemployed or become ill/disabled
  • Repairs to your car
  • The balance of your loan or the stated value of your car if your car is repossessed for any reason
  • A rental car while your own is stuck in the shop
  • A down payment on a new car if you need to buy one
  • Any balances that are carried over from an old loan into a new one

Before you choose to add gap insurance, make sure that you understand what it is meant to be for and whether or not you really need to have it. Do not buy insurance coverage that you do not need, especially if it won’t cover your expenses or help to repair or replace your car in the event of a loss.