Do I need gap insurance?

DOK Insurance Agency

Quick legal disclaimer: Some of the information provided below are based on personal experience. We are not trained to interpret the contract language of Gap programs offered by dealerships. The decision whether or not to buy Gap insurance through the dealership is ultimately your responsibility.

When you should consider gap insurance

GAP is not required by law and we have not seen it required by a lender. If a dealership tells you something different, we would recommend you finding another dealership.

Gap insurance pays for the difference in what the insurance company is willing to pay based on the vehicle’s value and the loan balance. If, for example, you by a new car for $40,000 and put down $1,000, you pay off a balance of $39,000 over time. The moment you drive the car off the lot, the value of your now “used” car, could drop anywhere from 5-30%+. If you total your car on the way home from the dealership (or months later), you are shocked to find out that the insurance company is only willing to pay – let’s say – $33,000 for it.

This often upsets insurance clients and some insurance companies have responded by advertising New Car Replacement or similar options. It’s important that these are extra features that you need to pay for. What clients simply need to understand is that an insurance company needs to pay for the value of the vehicle at the time of loss just as if you tried to sell your recently purchase vehicle. So if you find out that you cannot afford your monthly payments and decide to return the car to the dealership, they would most likely only offer you as little as $30,000 since trade-in values are usually lower than private party values. Insurance companies base a vehicle value closer to the private party value.

Below is an example of how your payout will differ after a total loss:

Total Sales Price$40,000$40,000

Product Total loss with gap insurance Total loss with gap insurance
Down-Payment $1,000 $1,000
Amount Financed $39,000 $39,000
Vehicle Value $33,000 $33,000
Deductible $500 $500
Insurance Pays $32,500 $38,500
Your “Gap” (out of pocket cost) $6,500 $500 (deductible only)
How gap insurance works for a leased car

In many cases, since lease payments are usually lower compared to buying the car and because all new cars depreciate the most in the first few years, the market value of the leased vehicle is usually much lower than what is still owed on the lease contract. Even if you are leasing a vehicle, you are still responsible for the difference between what the insurance company will pay and what is still owed on the lease.

Before adding lease/gap coverage to your auto insurance policy, find out if the coverage is already included in the lease agreement. If it is included, find out how much it costs and compare it to what your auto insurance policy quotes you. In most cases, lease gap coverage that has been added to the loan is more expensive than similar coverage provided by your insurance company.

Should I get Gap insurance through the dealership?

So you just got done picking your dream car and negotiating a price with the dealership that was just fair enough for you to make a purchasing decision. You told them you wanted to stay within a certain monthly payment and they made sure they found just the right car for you. As you are sitting in front of the financing agent, he or she is telling you about the importance of extended services plans, GAP insurance, and sometimes other extra charges.
As we already mentioned, GAP insurance has its place. There are some differences between the GAP insurance your insurance company might offer and the one offered by the dealership:

Product Through Insurance Through Dealership
Cost As low as $3/month Can range from $300 – $1,000+
Contract length Can be canceled anytime Cannot be canceled
Negative equity from trade-in Not covered Some gap programs cover it
Deductible Collision deductible applies Some gap programs cover it
Other additional costs (i.e. service agreement) Usually not covered Some Gap programs cover it
Gap for used vehicles Usually only available to newer cars Usually accepted
When do I not need gap insurance?

If you are purchasing a new or slightly used car, the need for gap insurance primarily depends on the amount you paid down. While there is no perfect formula, you will probably face a “gap” for the first few months or years of paying off a loan or lease if you paid less than 30% down. With low interest rates, many clients choose to pay down as little as possible. Keep in mind that if you pay a larger percentage down on a new vehicle, your insurance policy will still only pay for the value of the vehicle at the time of loss so you could lose out on a big part of your down-payment. In that case, you may want to consider a new car replacement option.

Gap insurance also becomes unnecessary if you traded in a vehicle that equaled to a significant down-payment. So in the example of the $40,000 vehicle above, if you traded in a car that paid down $8,000, you will most likely not need GAP coverage.

Please do not hesitate to call us at 425-242-5252 before or shortly after you have purchased a vehicle. Even if you added Gap coverage to your loan, you usually have at least a full month to request a full refund.

T: (425) 242-5252
O: 425-242-5252
A: 1500 Benson Road South, Suite 201 Renton, WA 98055

Dominik Kunigk

Managing Broker & President

Dominik was a German exchange student in high school before graduating from the University of Washington in Business Administration – Information Systems and Retail Management. His insurance career started in 2008 when he decided leave his retail management career behind to start his own business. His American Family Insurance agency quickly grew to service 700 clients and families. While the idea of becoming an independent broker started in 2010, a horrific car accident put that plan on hold. In 2014, Dominik and his wife Michele changed from a captive agency to become the independent agency that you see today.

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