What Is Gap Insurance And How Does It Work? – Forbes Advisor
If your car is wrecked or stolen, the last thing you want to hear is that you owe more on the car loan than the car is worth.
If you have collision or comprehensive coverage, your auto insurance company will pay the value of your car in a total loss settlement, not what you owe on a car loan or lease. But if you owe more on your car than it’s worth, gap insurance can help close that gap.
Here’s a look at what gap insurance is, how it works, and how to buy it.
what is differential insurance?
Gap insurance is an optional auto insurance coverage that helps drivers whose auto loan balance is greater than the value of their vehicle if totaled.
how does gap insurance work?
If your vehicle is totaled in a situation covered by collision or comprehensive insurance, your insurer’s maximum claim payment is the value of the vehicle just before the incident.
Gap insurance, sometimes called loan/lease coverage, covers the difference between what you owe and the value of your lost or stolen vehicle.
This is how a typical gap insurance claim works:
- If your car is stolen or totaled in an accident covered by your auto insurance, you file a claim under the collision or comprehensive insurance portion of your policy (whichever coverage is applicable).
- Your car insurance company pays you the actual cash value (ACV) of your car, less your deductible. For example, if your car is worth $17,000 and has a $500 deductible, your insurance payment would be $16,500.
- If you owe more on your loan or lease than the insurance payment on the value of your car, differential insurance will pay the difference. For example, if you owe $20,000 and the ACV is $17,000, your gap insurance will pay $3,000.
- your car insurance deductible
- Past due payments and late fees on your auto loan or lease
- security deposits
- extended warranties
- Balances carried forward from previous loans or leases
- lease fines for high mileage or excessive use
- charges for credit insurance related to the loan
- a down payment on a new car
- you rent your car
- got a car loan for five years (60 months) or more
- financed most of the car and made a small down payment of less than 20%
- transferred negative equity from your last car loan to your new auto loan (make sure you get a policy that covers negative equity)
- purchased a vehicle that depreciates in value faster than other vehicles (more on this below)
- car insurance companies
- car dealers
- banks and credit unions
- all states
- car owners
- series
- at the national level
- travellers
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- amica: amica’s new auto replacement coverage is part of your platinum choice auto package. amica new car replacement coverage replaces a totaled vehicle with a new car if it is less than a year old and has less than 15,000 miles.
- Farmers: Farmers offer new car replacement coverage for a vehicle of the same make and model if your car is destroyed within the first two model years and 24,000 miles.
- Nationwide: Nationwide provides new car replacement for a vehicle less than three years old.
If you don’t have gap insurance and the outstanding balance on your loan or lease is more than the value of your car, you’ll be responsible for paying the loan yourself. Some lenders or leasing companies may require you to have differential insurance. That’s because it helps protect them from buyers walking out on a loan or lease if the car is wrecked or stolen.
Some gap insurers may cover you for the entire loan balance, including any negative principal included in your new auto loan. For example, if you trade in a car you owe more than it’s worth, that negative equity carries over to your new loan. however, not all gap insurance policies will cover negative equity, so be sure to purchase a policy that covers you if you invested negative equity in your new auto loan.
what does gap insurance not cover?
Here are some common expenses that gap insurance does not cover:
Do I need differential insurance?
Whether you need differential insurance depends on how much you have left on your car loan or lease and the value of the vehicle.
Here are some common situations where gap insurance can be useful:
If you currently have a car loan or lease, you can compare the value of your car on a website like nadaguides to the balance of your car loan or lease. the difference between the two is the gap.
But once the amount you owe is less than the value of your car, or just a little more, there’s no reason to keep gap insurance. That’s because there will be little to no gap insurance payout possible. For example, if you owe $15,000 and your car’s ACV is $17,000, there won’t be a gap if your car is totaled or stolen.
And if you sell your car, you must cancel your gap insurance.
Where can I buy differential insurance?
You can usually buy gap insurance from:
Please note that not all auto insurance companies sell differential insurance and it may not be available in all states. for example, geico and farmers do not sell differential insurance.
insurance companies that sell gap insurance
many auto insurance companies offer differential insurance, such as:
cost of differential insurance
Differential insurance adds an average of $60 per year to your annual auto insurance cost, according to a Forbes Advisor analysis of differential insurance costs at large insurance companies.
And when you no longer need gap insurance, because your loan balance is roughly equal to or less than the value of your vehicle, you can remove it from your policy.
Differential insurance is much cheaper through an auto insurance company compared to a car dealer. Buying gap insurance from a car dealer may seem convenient, but it can often end up costing you more in the long run. Auto dealers typically charge up to $600 for gap insurance, according to Trusted Choice, a group of independent insurance agents.
The cost of gap insurance might be included in your car loan, but that means you’ll also pay interest on it. You’ll also lose the flexibility to cancel your gap insurance since it’s tied to your loan, meaning you could end up paying for something that’s no longer useful.
gap insurance cost per company
how much does differential insurance cost?
Gap insurance typically adds about $20 per year to your annual premium, according to the Insurance Information Institute.
And when you no longer need gap insurance, because your loan balance is roughly equal to or less than the value of your vehicle, you can remove it from your policy.
Differential insurance is much cheaper through an auto insurance company compared to a car dealer. Buying gap insurance from a car dealer may seem convenient, but it can often end up costing you more in the long run. Auto dealers typically charge up to $600 for gap insurance, according to Trusted Choice, a group of independent insurance agents.
The cost of gap insurance might be included in your car loan, but that means you’ll also pay interest on it. You’ll also lose the flexibility to cancel your gap insurance since it’s tied to your loan, meaning you could end up paying for something that’s no longer useful.
alternatives to differential insurance
Some auto insurance companies offer other types of coverage that sound similar to gap insurance. Here are two alternatives to gap insurance that might interest you.
new car replacement coverage
New car replacement coverage reimburses you enough to replace your wrecked or stolen vehicle with a new car.
If you have this coverage, the insurance company reimburses you enough to replace your new vehicle instead of giving you the actual cash value of the vehicle, which takes depreciation into account. your vehicle must meet the age and mileage requirements in order to take advantage of new car replacement coverage.
There is usually a deductible attached to new car replacement coverage.
Here are examples of companies that offer this coverage:
As you can see, new car replacement coverage varies significantly by company, so be sure to read the fine print and understand exactly what you’re getting if you want new car replacement protection.
best car replacement coverage
Some auto insurance companies, like Horace Mann and Liberty Mutual, offer better auto replacement coverage. This reimburses you for a newer or better model of your totaled car. this coverage may have mileage requirements.
liberty mutual best car replacement reimburses policyholders for a car that is one model year newer and with 15,000 fewer miles. here is an example. let’s say a 2020 car with 30,000 miles totals it. this coverage would provide reimbursement for the policyholder to get a 2021 model of the same car with 15,000 miles accumulated.
Optional coverage is only for policyholders who own their car. not available for rented cars.
is gap insurance worth it?
The relatively small cost of gap insurance from an insurer can be worth it if you owe much more on your car loan or lease than the vehicle is worth.
If you have enough money not to worry about the “gap,” you can choose to skip gap insurance.
For example, if your car is currently worth $10,000 and you owe $12,000 on the loan, you might be willing to absorb the difference if your car is totaled. But if you have a $30,000 car loan on a $22,000 car, you may not be able to pay the $8,000 gap. in this case, it may be worth paying for gap insurance.
vehicle depreciation could influence your differential insurance decision
If you bought a car that is rapidly depreciating in value and have a large car loan, differential insurance becomes a better option. the average car depreciates 40.1% after five years, according to a 2021 study by iseecars, which analyzed more than 800,000 car sales.
The Nissan Leaf depreciated the most over five years, losing 65.1% in value. That’s because electric vehicles are becoming obsolete due to rapid advances in range and battery life, according to Karl Brauer, Senior Analyst at IseeCars.
“Government incentives, such as the $7,500 federal tax credit, also play a role in the sheet’s steep depreciation, as its resale value is based on original msrp, but real-world transaction prices when new they are effectively $7,500 lower,” brauer said in a statement.
related: the most and least expensive cars to insure
top 10 vehicles with the highest depreciation in five years
Certain types of luxury cars also depreciate at a much faster rate. For example, the BMW i3, BMW 7 Series, Maserati Ghibli, and BMW 7 X5 depreciated by more than 60% in five years.
vehicles with the lowest depreciation in five years
While the average vehicle depreciates 40% over the first five years, vehicles with the best resale value depreciate between 1.6 and 4.4 times less than the average, according to iseecars.
“jeep wranglers are known for retaining their value due to their enthusiastic fan base, as well as their durability and performance on all terrains, especially off-road,” says brauer. he adds that the iconic design hasn’t changed much, so even older models don’t look dated. dated.
depreciation of ecological vehicles in five years
Thinking about going green with an electric or hybrid vehicle? the five-year average depreciation for hybrid vehicles was 45.4% and the five-year average depreciation for electric vehicles was 53.7%
Depreciation over five years is shown here for some hybrid and electric car models.
related: ecological cars more and less expensive to insure
how do insurance companies decide to totalize a car?
gap insurance will kick in if your car is totaled, but the definition of a “totaled” car varies from state to state. Many states set a threshold percentage of a car’s value, and a car is considered total if the cost of repairs exceeds that percentage. repair costs generally include parts and labor.
Some states specify the use of nadaguides to determine the value of a vehicle. other states only specify that the value of the vehicle must come from a current edition of a nationally recognized compilation of values, including databases.
Other states use what is called a “total loss formula” (tlf). For example, in California, phone is repair cost + salvage value ≥ actual cash value. If the sum of the cost of the repair and the salvage value is greater than the ACV, then your car is considered a total loss.
