Gap insurance: Do you need it?
You’ve just bought a new vehicle. Do you need Gap insurance before you drive it off the lot?
First, let’s take a look at what it actually is. Gap insurance – which is an optional coverage - provides you with financial protection against loss if your vehicle is written off after an accident or theft. It helps you pay off your auto loan if you owe more on your loan than your vehicle’s worth in the marketplace.
Dealerships offer gap insurance for new vehicles, but you might also be offered if the vehicle you’re purchasing is less than three years old, particularly if it is a luxury model. Many - but not all - leases include gap coverage. It is also offered by some auto insurers and financial institutions.
Compared with other aftermarket products dealerships offer, gap insurance is relatively inexpensive. While extended warranties can run several thousand dollars, gap insurance usually sells for $350 to $800. Prices will vary depending on the length and amount of the car loan.
Here’s how Gap coverage actually works: Let’s say a driver owes $20,000 on a vehicle that is totalled, but the insurance company determines the vehicle's market value is only $15,000. Gap insurance would cover the remaining $5,000 balance.
Gap insurance is not the same as new vehicle replacement coverage, offered by insurers like Colwood. In that case, if your vehicle is totalled, the insurer provides a top-up so you can purchase the exact same vehicle in the newer model year. It can also provide coverage for original equipment parts if the vehicle is not a total loss and other benefits.
But this form of insurance benefits some drivers and not others. The vast majority of new-vehicle buyers finance their purchase. If you owe more on the vehicle than it is worth, that's called being "upside-down" - not uncommon in the industry.
The average vehicle depreciates as much as 20 per cent as soon as you drive it off the lot. If you’re making a down payment more than 25 per cent, or if your insurance policy will replace your car if it’s declared a total loss in the first few years of ownership, gap coverage may not be necessary.
However, according to Edmunds, if you fall into any of these six categories, you might consider getting it:
- You’re taking out a car loan that’s longer than 60 months. Longer loans mean it takes longer to reach the point where the loan balance and the vehicle’s value match.
- You’ve traded in a vehicle with negative equity. That means you owe more on the vehicle than it’s worth, and you’re rolling that negative equity into your new car loan.
- You’re buying a car that traditionally loses value quickly. Models that have lots of options, luxury vehicles and domestic sedans are examples of this.
- You intend to drive lots of miles in a short amount of time. Higher-than-average mileage means greater-than-average depreciation.
- Your loan has a high-interest rate. That means it will take longer to reach the break-even point.
- You’re buying or leasing a car with little or no down payment. Furthermore, if you've bundled the costs of tax and registration into your financing, it will take even longer to hit that even point.
When you're initiating a car loan or lease, talk to your insurance broker, loan officer, or dealership finance manager about gap insurance. Do some comparison shopping on the price to ensure you're getting the best deal.
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