What You Don’t Know about Gap Insurance

When one searches for “gap insurance”, the results are mostly about its definition, its importance, and whether one should buy it from the dealership. But it is rare to get information on how and where to buy it if one decides to get it.

People should consider gap insurance if they have an auto loan. When the car gets totaled in an accident, they still have to pay off the loan. But regular auto insurance only pays the maximum amount of the car’s current value. Because of depreciation of car value, that means the amount the insurance company will pay is often less than what one actually owes to the loan lender. The gap insurance then kicks in to pay off the difference.

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          If you know what gap insurance is and decide to get one, then where and how to buy? It is widely known that it is not a good idea to buy at the dealership. So we exclude that option.

The best way to buy gap insurance is to shop together with the regular auto insurance. Here is the trick: almost all of them do not sell gap insurance independently, you have to either have your auto insurance with the carrier and add gap insurance to your policy, or have your auto loan with the carrier.

For example:

State Farm: in order to buy gap insurance from them, one needs to take its auto loan. If one has an auto loan from another lender, he/she will not be able to buy gap insurance from State Farm even if he/she already has auto insurance with them.

Progressive/Liberty Mutual: in order to buy gap insurance from them, one does not have to take auto loan from them. But one needs to switch auto insurance to them, and then add gap insurance to the policy.

Different insurance companies have varied policies regarding gap insurance. If you are going to take an auto loan and really need gap insurance, you need to be careful about from where to buy your auto insurance policy. It will be more convenient if you have the option to add gap insurance to your existing auto insurance coverage.

If you are refinancing an auto loan, you can also consider companies like State Farm, who sells auto and gap insurance all together. Unless their rate is competitive, I would not switch an auto loan just in order to get its gap insurance. 

I want to disclose that I am not familiar with gap insurance when leasing a car. I guess the theory and practice are similar. Financial wise, leasing cars is a bad idea.