What Does GAP Insurance Cover On A Lease?

The average new car depreciates by 20% in the first year of ownership. This statistic applies to all cars, ranging from sedans to SUVs. Vehicles are susceptible to depreciation and this poses a problem when you’re on a lease or lend money to purchase a new car. There are insurance policies that can make up for the difference in depreciation. If you’ve put down a large payment on your lease, losing your car could mean that you’ll owe more money than it’s worth. GAP insurance can reimburse you for the original value of your car by making up the difference in depreciation.

So, what does GAP (Guaranteed Asset Protection) insurance cover on a lease? GAP insurance covers the car at the original market value when you’re on a lease, similar to owning the car. It includes the replacement cost for a new car if it’s declared a total loss and/or repairs if it’s stolen and recovered. It also covers the taxes and everything else rolled in your car lease.

Consult your insurance agent to discuss the gap in your car lease. The idea behind gap insurance is to cover you on a lease and make up the difference between what you owe to pay off the rest of the lease term. Similar to buying a new car in cash, the car’s value depreciates year after year but you still have to make the same car payments and insurance payments. Note that you’re not going to need gap insurance for the entire duration of your gap period. You’re only going to need it when the value of the car starts depreciating. Most people take out a gap policy for leases that last 5-10 years.

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How Does GAP Insurance Work?

GAP insurance works by covering you for the gap between the amount you owe to the dealership and the actual cash value (ACV – aka market value) of your car today. Insurance companies offer GAP insurance as an optional add-on and if you have an automotive insurance policy, you can take out GAP insurance in addition.

The actual cash value is the market value of your car if you were to sell it today. However, this doesn’t reflect the size of the payments you keep making because those are proportional to the original value of the car. This is why if something happens to the car and the insurance pays you for the current market cost, it may not be enough to cover the rest of the money you owe on the lease.

GAP insurance is never a mandatory policy and it’s always an add-on. For instance, if you roll out of the dealership with a new Mustang worth $80,000 and in 2 years that same Jaguar is worth $50,000, you’re going to need insurance that can cover you for the $30,000 depreciation. While it may cost you more to insure your car for depreciation, you could be in serious trouble if you end up in an accident or have your car stolen, and then the insurance company only pays you $50,000 which is what the car is worth today. 

You need GAP insurance to cover the difference between what you owe and how much your car is worth. Even if you’ve paid off half of the lease amount, you’d have to pay the rest out of pocket without GAP insurance. Many automotive policies cover the deductible on GAP insurance.

Is GAP Insurance Good for Leased Cars?

Yes – GAP insurance is recommended for all new cars if you want to be 100% safe from all possible depreciation expenses. If you bought the car on a loan, the loan likely had a high-interest rate. This is because the principal you put down on the vehicle takes longer to pay as opposed to the car depreciating. GAP insurance is recommended for leases that are at least 5 years.

Most people take out a GAP insurance policy after the car’s value starts dropping which is usually within the first couple of months. If you have an accident days after you drive your new car off the dealership lot, it’s going to be easier to pay off the lease because all you have to do is fix and sell the car. The car doesn’t depreciate as much during the first year. However, if you’ve been driving the car for years you’ll likely have depreciation up to 50%. 

Pro Tip: You can check whether you have a gap before you even sign a lease on a car. Simply check what you’re going to pay for the car over the duration of the lease and compare that to the current sales price of vehicles from that long ago. This will give you an indicator as to whether you have a gap in your car from the start. You can instantly purchase a gap insurance policy.

The cost of GAP insurance fluctuates. The more you pay off, the less you’re going to owe which lowers the premium. This is why you can expect to pay more upfront, or if you take out a gap policy once you’ve paid off a significant chunk of the lease.

You may need gap insurance for various other situations. For examples, if you’ve put down a large down payment on the car or if you bought the car in full on a loan. Let’s say you got a short 2-year loan from the bank. It’s a good idea to take out gap insurance on such a loan. If the amount you owe on the lease is less than the value of the car, this is a time to drop your coverage.

How Much Does GAP Insurance on a Lease Cost?

GAP insurance can be quite affordable, but it’s more expensive at the start. This is because you owe more money on the lease at the start which means the insurer is at high risk. Sometimes, GAP insurance can be added for as little as $20 annually. GAP insurance is significantly more expensive if you purchase it from the dealership or the bank that gave you a loan for the car.

To cut on costs, always purchase GAP insurance from your auto insurer. There are certain factors that can affect the premium price for GAP insurance. The most important is the ACV of the car, which is the current market value. Your age and driving record will also have an effect. In some cases, the location will affect the premium.

How To Purchase GAP Insurance

Ready to purchase GAP insurance? You have many options.

  • Car Insurance. Reach out to your auto insurance provider and ask them for a gap insurance add-on policy. This is the most cost-effective way to do it, by bundling it with your current car insurance.
  • Dealership. Large car dealerships can add your car to their insurance and they will likely offer this while you’re purchasing the car. This is more expensive than going through auto insurance companies.
  • GAP Insurance Specialists. Certain companies offer GAP insurance exclusively. Their premiums can be as low as regular auto insurance companies.

Also read: Does GAP Insurance Cover Mechanical Failure?

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