What is GAP Auto Insurance and When Do You Need It?

GAP insurance is a car insurance policy that covers the difference between the current value of your car and the amount you owe on it. In other words, if you were to total your car today, your car insurance company would pay you the amount they determined your car was worth.

If you are in an auto accident with damage so extreme the auto insurance company either determines it cannot be repaired or that the repair costs would exceed the worth of the car, the insurance company may decide to "total" your car. This means the car is not repaired, the insurance company keeps the car - usually to sell it for parts - and you are paid for the value of the car. If your car is stolen and not recovered, most GAP insurance will also apply since you will be paid so you can purchase a replacement.

How Does an Insurance Company Determine the Worth of Your Car When It is Totaled?

Some insurance companies use the blue book car prices to determine what they pay; others have their own rate charts. If you financed your car purchase, the amount the auto insurance company would pay you might be less than the amount you still owe on the car, known as being "upside down" on your loan. This is especially true when a car is still fairly new since the car's value depreciates as soon as you buy it, but you owe the full value of the loan. Without GAP insurance, if you owe more money on your car than the insurance company pays you and your car is totaled, you will be left making payments on a car you no longer even have, while trying to make payments on your new car. However, if you have a GAP insurance policy, it will cover the "gap" between the value of your car and the amount you owe on your loan. Note that in the event your car is totaled, a GAP policy will not cover any payments on which you were behind or any other penalties on the loan you may have accrued.

GAP Insurance is Available For Both New Cars and Used Cars

On a new car, a GAP policy will usually cover up to 130% of the MSRP. When you are buying a car from a car dealer, they may offer you a GAP insurance policy. While the policy may be a good idea if you are financing the car, dealers charge a premium for GAP coverage. As part of your car buying research, decide whether you will need a GAP policy and purchase it directly rather than through the dealership. The price for a GAP policy offered by an online insurance company may be half the average price quoted by a dealer. Several online car insurance companies offer GAP policies. For example, visit 21st Century Auto or ComparisonMarket.com online for fast quotes.

When is a GAP Auto Insurance Policy a Good Idea?

If you have gotten 100% financing on the car you are buying, GAP auto insurance is a very wise idea. Other circumstances under which you should consider a GAP policy are if you have placed less than 20% down on the car or have a very long-term loan.