Gap Insurance: How Does it Work and Do I Need it? – ValuePenguin

This is also known as guaranteed asset protection and only applies if you have a lease or loan for your vehicle. you just need to charge it until the amount you owe on your car is less than it’s worth; after that, you can cancel it.

Gap insurance typically costs between $50 and $250 per year to add to an insurance policy. what you’ll pay depends on your insurer and how expensive your new car is. We always recommend that drivers compare quotes from multiple insurers to get the best rate.

Reading: How to total a car with gap insurance

what is differential insurance?

This situation is sometimes referred to as being “upside down” or “underwater.” Upside down is a common occurrence if you finance a new vehicle. new cars can lose value faster than you pay off the loan.

It’s especially likely to be backwards if you make a smaller down payment or opt for a long loan term, as that means your loan balance will decline more slowly. Being upside down on your car loan isn’t necessarily a bad thing, but it does put you in a position of additional financial risk.

If your new car is totaled or stolen, your comprehensive or collision coverages will cover up to the actual cash value of the car. but you would still be responsible for the difference between how much you owe on the loan and the value of the car. gap insurance covers that difference.

pros and cons of differential insurance

Gap insurance can offer a significant degree of protection in certain situations, but it is an additional cost to consider. If you are not required to purchase gap insurance but have the option, here are some items to consider:



how much does differential insurance cost?

Compared to a typical car insurance bill, differential insurance is generally inexpensive. the typical cost for gap coverage is $144 per year. however, there is a big difference in the cost of gap coverage between different insurers. Nationwide and Travelers had the best prices among the main insurers analyzed, with an average price of around $50 per year.

That’s about 80% less than what it costs farmers and erie, the two most expensive insurers we looked at.

the cost of gap insurance also tended to correlate with the overall rates of each insurer; In general, if an insurer has low prices for car insurance overall, their gap coverage prices tend to be affordable as well.

All insurers take into account the model of your car when setting the price of gap insurance. In general, higher-end vehicles like a Tesla or Mercedes cost more to purchase coverage than cheaper vehicles like a Honda Civic.

where can you buy differential insurance?

There are three main ways to buy gap coverage:

Of the three, buying gap coverage from the dealer is the most convenient, but it’s also usually the most expensive.

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Banks sometimes offer gap coverage as a supplement to your car loan. the price varies, but it’s usually a one-time fee of around $300, or you can roll it into your monthly car payment.

Auto insurance companies often offer gap insurance as well, and the cost typically ranges from $50 to $250 per year. Whether your insurer or bank is a better option for you will depend on your situation, including the amount of down payment you’ve made and the length of your car loan. a longer loan term means you pay off your car more slowly and your vehicle will be under water longer.

car insurers that offer differential insurance

Most major auto insurance companies offer some form of differential insurance, although many have limitations on the vehicles they will insure. Geico is the only major insurer that does not offer any gap coverage.

If you’re interested in purchasing gap insurance only, some auto dealers offer separate gap insurance coverage. however, most of the time, insurers offer better rates for differential insurance compared to dealers. While car dealers may say you must have differential insurance or buy it from them, it’s up to you to decide whether or where to buy it.

what is (and is not) covered by gap insurance?

Differential insurance can be a beneficial part of your auto insurance coverage, but it only protects you in certain situations. this is when gap coverage will (and won’t) protect you:

who should get gap insurance?

Not all drivers are eligible for gap insurance, and not all eligible drivers should get it.

Even if you financed your car, you only need gap coverage if the amount you owe is more than the value of the car. The best way to determine if you need gap coverage is to find the cash value of your car and subtract it from how much you owe.

Calculating the difference between your car’s value and what you owe is the best way to know if you need it. You’re also more likely to need gap coverage if any of the following apply to you:

You probably don’t need to have gap insurance forever. Once you pay off the loan to the point where it’s worth more than you owe, you must remove the gap coverage, as long as the terms of your lease allow. In the event your car experiences a total loss, having gap insurance will not result in any additional payments.

is gap insurance worth it?

It’s worth buying gap insurance if the cost isn’t significant and you could find yourself with a large bill to pay for a car you no longer own. It’s important to do the math and determine how “upside down” you are on your current auto loan. If your loan payment is close to the actual cash value of your vehicle, you may see little or no payment in the event of an accident.

However, if your car is worth considerably less than the money you still owe, gap insurance is well worth the generally low cost.

Many policyholders don’t want to buy additional coverage if they don’t need it. Remember, your “gap” is narrowing as your car depreciates and you continue to make monthly loan payments.

how to know if you have gap insurance

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There are two places to check if you already have gap insurance: your current auto insurance policy and the terms of your lease or loan. gap coverage is sometimes sold as a dealer add-on when financing a car, so check to see if you’re already paying for it before adding coverage.

Even if you have coverage, it’s worth seeing if you can get cheaper differential insurance elsewhere, as car dealers typically charge more for it.

how to calculate insurance differential

To calculate your differential insurance it is only necessary to take the current value of your vehicle from the remaining balance of your loan. You should be able to ask your lender how much you still owe, and the Kelley Blue Book is a good tool for finding your car’s value.

In this example, you can see how gap insurance can potentially save you thousands of dollars if your car is wrecked or stolen:

It is important to note that the amount covered by the insurance gap decreases over time. At a certain point, it might be worth the risk to drop coverage, assuming your lender allows it.

get reimbursed for gap insurance

You don’t need gap insurance once you’re no longer upside down. Once you’ve paid enough of the price of your vehicle so that the amount you owe is less than the value of the car, you can cancel the gap coverage.

If you prepaid for coverage, any unused premium will be refunded. For example, if you paid for six months of gap insurance but your car is paid off three months later, you’ll be able to get a refund for the other three months.

how long does it take to pay gap insurance?

Theoretically, the amount of time between an accident and gap insurance payout can be as little as five days, depending on where you live, but it’s much more likely to take at least several weeks, and often as long. more than a month. different states have different laws, and the process has multiple elements.

It typically takes up to 30 days for an insurance company to declare a vehicle a total loss, although it can take longer. after making a determination, the insurer will begin processing the shortfall payment.

You should talk to both your insurer and the lender or landlord during the process to get an idea of ​​how long it may take. More importantly, you need to figure out how the time works between your next payment and when the differential insurance payment starts to cover the loss.

when does gap insurance not pay?

gap insurance will not pay in a wide variety of situations, meaning anything less than a total loss. If you have an accident where the car is repairable, gap insurance will not pay. Some of the situations where you won’t get a gap insurance payment include:


To illustrate the costs of differential insurance, we collected quotes on five new cars: a Honda Civic, a Ford F-150, a Hyundai Santa Fe, a Mercedes GLC300, and a Model 3 Tesla. We collected rates from five major insurers we offer. Gap Coverage: Series, Farmers, Nationwide, Progressive, and Travelers. All quotes are based on state averages in Illinois.

This analysis used insurance rate data from Quadrant Information Services. quotes referenced were publicly obtained from insurer filings and should be used for comparison purposes only. unless otherwise noted, quotes are for the base trim level. actual rates for your model may differ.

See also: Cheapest Auto Insurance Quotes in South Carolina (2022) – ValuePenguin

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