If you have financed your vehicle and still owe a balance on your loan, or you are planning to finance a vehicle soon, then this information applies to you.

Gap insurance is designed for those who experience a collision or theft of a vehicle whose cash value is significantly less than the financing balance owed. In the event of the vehicle being written off, gap insurance will cover the difference between the vehicle’s cash value (the amount paid out by your auto insurance policy) and the amount remaining on the vehicle’s financing. Gap insurance is meant to be used in conjunction with collision and comprehensive auto insurance.

According to the Insurance Information Institute (III), the moment you drive your new vehicle off the lot, its value decreases. Additionally, the value of most vehicles will depreciate approximately 20 percent in the first year of ownership.

If your vehicle is totalled or stolen, your auto insurance provider will only pay out the current depreciated value of the vehicle. In many cases, this amount is substantially lower than the amount remaining on the financing, a situation referred to as “being underwater.” The owner of the vehicle is then left to pay off the balance of the loan without receiving any real benefit. Those with gap insurance coverage avoid this situation.

Now let’s apply this to a real world example.

Let’s say you purchased a new vehicle in 2016 for $50,000. In 2020, it was stolen and never recovered. The amount on your financing at the time of theft was $30,000 but the insurance company estimated the vehicle’s depreciated value at only $15,000. Subtracting the payout amount (equivalent to the depreciated value) from the balance owed on your loan, you are left with a $15,000 liability. If you had a gap insurance policy in place at the time of the incident, your gap insurance provider would pay the remaining $15,000 to close out the balance of your vehicle loan, putting you in a position to finance a new vehicle sooner.

You don’t need to purchase gap insurance at the time of financing to qualify for a policy, so don’t worry if you bypassed this option at the point of sale.

While it’s offered at car dealerships, gap insurance is also available through many other insurance providers, including General Insurance Services. In fact, purchasing your gap insurance policy outside of a dealership will often save you money.

Different insurers have different requirements for issuing a gap insurance policy. It is common that you must be the original owner of the vehicle and that the vehicle is not older than three model years. If you are unsure of the requirements for your preferred policy, call your insurance provider to confirm you meet the qualifications before purchasing.

Bear in mind that the reimbursement will be paid directly to your auto lender to ensure the funds are used for their intended purpose and not put towards a new vehicle. It is, however, common for gap insurance to be offered in a package with new vehicle replacement coverage, which would cover the cost difference between your totalled or unrecovered vehicle’s depreciated value and the current value of a new vehicle of the same make and model.

It is also worth noting that gap insurance is only available if you are the original loan or lease holder on a new vehicle. Should you have taken a lease over from someone else, you will not qualify to purchase this policy.

So, here’s the million-dollar question: Is gap insurance worth the investment?

There are a few points of reference you can assess to decide for yourself whether purchasing a gap insurance policy will be beneficial for your unique situation. According to the III, you should consider gap insurance if the down payment on your vehicle was less than 20 percent, if your auto loan is sixty months or longer, or if you’re leasing a new vehicle. Our advisors can help you perform a cost analysis against your remaining balance if you are considering purchasing a policy after the fact.

If you’ve decided that gap insurance may be the way to go for your upcoming or existing new vehicle, we would be happy to connect and discuss a policy that works for you.

Get in touch with us at one of our four locations by phone Monday through Friday, from 8 a.m. to 5 p.m., or by email anytime. We look forward to having your back.