When you buy a new car, it automatically loses 9% to 11% of its value the moment you drive it off the dealership lot. At this point, you owe more money than your car is worth. Gap insurance is a

car insurance

add-on that covers the difference between the actual cash value of your car and the amount owing on your loan if you total the vehicle.

Whether you need gap coverage depends on a few individual factors. That’s why the car insurance experts at

Jerry

are here to elaborate on this additional coverage option.

We’ll cover what gap insurance is, whether or not you need it, and how you can add it to your insurance policy without an outrageous premium hike using the

trustworthy Jerry super app

. Let’s get started!

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What is gap insurance?

As if the dealership dip wasn’t enough, a new vehicle goes on to lose 20 to 30% of its value in the first year of ownership due to depreciation. Even with a hefty down payment, your auto loan can quickly become greater than the actual cash value of the vehicle—this is called negative equity.

This isn’t an ideal situation—but that’s where gap insurance comes to the rescue. If you total your vehicle, gap insurance will cover the difference between the amount you owe to your lender and the actual cash value of your car (which is what your insurance company pays out).

New car replacement vs. gap insurance

While gap insurance covers the difference between your car’s value and the amount you owe on your loan,

new car replacement insurance

will provide an identical “replacement” of the same make and model for your totaled car.

Both coverages serve the similar purpose of fighting the effects of depreciation.

MORE: How does the insurance company determine the value of a totaled car?

How does gap insurance work?

Suppose your car is determined to be a total loss after an accident. In that case, you’ll file an insurance claim and your

comprehensive coverage

collision coverage

will reimburse you for the actual cash value of the car (see Kelley Blue Book for estimates).

But what if it’s still not enough to completely pay back your lender? This is where gap insurance coverage will come into play.

Gap insurance works by covering the difference between what you owe on your auto loan and the depreciated value of your vehicle. Sometimes, it will even pay your comprehensive or collision deductible!

Some states even require car dealerships to offer gap insurance as a part of the vehicle-buying process. This makes it important to know what your vehicle is actually worth and how much your insurance company will pay you if it’s totaled.

Is gap insurance worth it?

According, to the Insurance Information Institute, it costs around $20 to $40 annually to add this type of coverage to your car insurance policy. Technically, this can be considered a con—but not a very expensive one!

Considering the thousands of dollars you could lose to depreciation from a totaled car, the investment in gap insurance seems to be a no-brainer!

Gap insurance tends to be worth it if any of these scenarios apply to you:

You bought a new vehicle within the past year

Your down payment was 20% or less

The loan/lease period on your car is less than five years

You rolled over what you owed on a previous vehicle into your new loan

Your loan balance is more than the actual cash value (ACV) of the car

You drive a lot (which causes a vehicle to depreciate faster)

MORE:

When your car is totaled and you don’t have gap insurance

Do you need gap insurance?

Let’s answer the big question—should you purchase gap insurance? If you fall into one of these categories, it’s recommended that you get it.

The value of your car loan exceeds your car’s actual cash value—which will include a depreciation rate of 20% after the first year

You have a longer loan term, typically exceeding 60 months or five years

You have a small down payment, usually less than 20%

You have a high-interest rate

You couldn’t pay off your loan if your vehicle was totaled

That said, once your auto loan balance is less than what you owe on your car, you usually have the option to remove it. You also may be eligible for a refunded payout from your gap insurance company or lender.

MORE: How to calculate total interest paid on a car loan

How to find cheap car insurance (that includes gap coverage!)

Finding cheap

car insurance

that is customized for your preferred level of risk (within the limits of state law, of course) has never been easier thanks to the innovative

Jerry

app.

First, tell us what kind of coverage you’re looking for—with or without gap insurance. Then, we’ll quickly sort through more than 55 car insurance companies and find you a customized quote for the best price. On average, Jerry users save more than $800 per year with no phone calls, no long forms, and no hassles.

“I just financed a new car and knew my insurance premium was going to rise.
Jerry
was well worth it to use. They helped me find a lower premium and canceled my old policy instantly when I was ready to switch!” —Meghana D.

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Is gap insurance included in full-coverage insurance?

Full-coverage protection for your vehicle typically starts with liability insurance, collision insurance, and comprehensive insurance. After that, you can add on things like gap insurance,

MedPay

, and

personal injury protection

to increase your financial security.

How long does gap insurance last?

Your gap insurance policy will last as long as you continue to pay for it. But remember, once your vehicle’s actual cash value exceeds your loan amount, it’s OK to drop it from your insurance policy.

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