Many auto insurance companies, like Metlife & Travelers, offer Gap insurance (sometimes called Guaranteed Auto Protection) to pay off the difference between your loan and the market value of your car, which your car insurance company pays, when your car is a total loss. Some auto insurance companies, like Progressive insurance, offer a limited version of gap insurance, called Loan/Lease Payoff Coverage.

When you buy a new or used car, many dealerships want you to buy their gap insurance. Who has the least expensive gap coverage? What is the best gap insurance coverage, or the best way to buy it? Do you need gap coverage? This blog post will give you the information to help you make an informed decision about gap insurance / loan or lease Payoff coverage.

Buying auto insurance, having your car totaled, and not getting enough money from the claim to pay off your car loan, makes people  feel ripped off by their insurance company. It is even more upsetting to find out your insurance company could have paid the auto loan in full, if you had the right coverage.

Some car insurance companies offer gap coverage, and some car insurance do not offer it. Auto insurance companies may not offer gap coverage in all states.

The Need for Gap Insurance

If you buy a new car, and you make less than a 20% down payment, or finance it for 60 months or more, you seriously need to consider buying gap coverage.

New cars usually depreciate about 30% in their first year. After 3 years, formerly new cars are often worth about 50% of their purchase price.

Auto insurance Comprehensive or Collision coverage pays the actual cash value of your car (basically, the market value), at the time of loss, less your deductible, if it is stolen or a total loss.

As soon as you drive your new car off the lot, it is no longer a new car, and it is not worth what you paid for it. Say you buy a $30,000 car. You have great credit, so you finance the full amount of $30,000 at 0% interest for 5 years.

A year later, your car is stolen and not recovered. Your car had a market value of $20,000 (30% less than your purchase price) when it was stolen. You have a $500 comprehensive deductible, so your car insurance company pays your claim at $19,500.

But your auto loan balance after one year is $24,000. You must pay an additional $4,500 out of your own pocket to be clear of the loan!

What if you couldn’t get 0% financing? Even with a down payment, you could be upside down on your car for a significant sum of money, while you are still paying the loan.

Depending on the car and market conditions, your new car could lose 30% if its value as soon as you drive it off the lot.

Even if you are not upside down on your car loan, do you want to be out 30% of your purchase price, if your car is stolen or totaled the next day? Did you know you are more likely to wreck your car when you are getting used to driving it?

Everyone should consider gap insurance for new or newer used cars less than 5 years old.

Particularly in these situations:

1. No or little down payment or trade-in value.

2. Loans 5 years or longer in duration

3. High interest loans

4. Leased vehicles

5. When you drive 15,000 miles or more a year.

6. When you roll over negative equity from your trade-in into your new car loan.

Where Can You Get the Best Gap Coverage?

Car dealers love to sell you gap insurance, but the dealer is not usually a good place to purchase it. Sometimes, if you are leasing a car, gap coverage is included and you have no choice. Other times, it is required for financing, but you have your choice where to purchase it.

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Also, you lose the coverage, and may have to buy it again, if you refinance your auto loan. Some dealer gap insurance coverage will pay your deductible, but I don’t think the additional cost is worth it.

Auto insurance companies offering gap insurance may charge you about 5% to 6% of your Comprehensive & Collision coverage premiums, included with your normal auto insurance bill.

You can drop the gap coverage whenever you want, if you no longer owe more than the market value of the car, and no longer pay for it.

To show you the potential cost, let’s say your 6-month Comprehensive premium is $150 for the new car, and the Collision premium is $250. To make the numbers simple, lets say the cost for gap insurance is 10% of the Comprehensive & Collision premiums. Gap coverage would cost you $40 every 6 months, and you can drop it when you no longer need it. Your actual cost will depend on your situation, but it is not likely your dealership will have a better price for your gap coverage.

Gap coverage or loan/lease payoff coverage will vary in how it works, and your eligibility for it, from insurance company to insurance company.

Some insurance companies may not offer it for used cars, and some insurance companies may let you add gap insurance at any time, and other companies may only allow you to add it within a certain time frame of owning the car.

Here are some common limitations:

1. You must carry Comprehensive & Collision coverage to have it, or for you to claim Gap coverage.

2, Gap coverage applies only for a covered Comprehensive or Collision claim where the vehicle is a total loss.

3. Gap coverage pays only auto loans from financial institutions.

If you buy a car with the proceeds from a personal loan, home equity loan, mortgage, or line of credit, Gap coverage will not pay these loans. Also, if a person loans you money for a car, gap insurance will not pay the person loaning you money.

4. Additional costs included with the auto loan, like a warranty or credit life insurance may not be covered by gap insurance.

If you have a claim where your gap insurance coverage will apply, make sure to keep paying your auto loan payments until the car loan is paid off by the gap insurance. Failure to do so may invalidate coverage or effect your credit.

How to Shop for Gap Insurance?

Buying a new car is a smart time to shop your car insurance. The auto insurance company you have now may not have the best coverage or price for your new car.

Before you buy and pickup your new car, decide if you will need gap insurance, then shop your auto insurance with all the leading insurance companies, and have gap insurance included in the price quotes.

Focus on getting auto insurance at the best price with the coverage you need, and don’t worry about which insurance company has the cheapest gap insurance. You want to pay low rates at the bottom line, not get a great deal on gap insurance.

Some auto insurance companies may not offer gap coverage. Gap coverage will differ among insurance companies, so make sure you buy the coverage best fitting your needs.

Some insurance companies offer loan/lease payoff coverage instead, such as Progressive. Per the Progressive website, payment is capped at 25% more than the actual cash value of the car, so it may not be enough to pay off your loan.

Some auto insurance companies offer replacement cost for new cars, if they are brand new, and have less than 15,000 miles. This won’t help you if you are upside down on your loan 13 months from when you bought it. Also, losses due to theft, flood, or fire are often excluded from replacement cost coverage, making it a poor substitute for gap insurance.

As always, consult your agent, and the insurance companies quoting you, to know how your insurance and your coverage options work.

Do you have gap insurance or loan/lease payoff coverage? Do you think you need it? Tell me about it. Please leave a comment on my facebook page. Follow me on Twitter for important insurance consumer news and new blog entries at CarInsWatch.