When you may need to buy gap insurance
Even though gap insurance is optional and not every eligible person needs to purchase it, you may decide you want the additional coverage. Certain situations that warrant considering gap insurance include the examples below.
If you have a car loan
Lenders may require that you have gap insurance if you take out a long-term car loan of five years or longer, according to the Insurance Information Institute. When you have a longer-term loan, you pay more interest up front, which means you have a higher risk of owing more than the car’s value. In addition, gap insurance ensures that you’ll be able to pay back your loan if you find your vehicle totaled or stolen.
If you lease your car
Leasing companies typically require gap insurance to protect their investment in the car. The company leasing your vehicle often builds gap insurance into the leasing agreement or as part of the contract. Monthly payments for a leased vehicle tend to be lower than typical auto loan payments, which increases the gap between the vehicle’s actual value and the amount you still owe. Gap insurance protects you, and the company you leased your car from, in the event of total loss.
If you have a high-value vehicle that depreciates quickly
Luxury vehicles depreciate faster than regular vehicles, which may lead you to be upside-down on your loan almost as soon as you drive it off the lot. Unless you make a sizable down payment on the car, your lender might require gap coverage to protect the loan collateral.
If you drive a lot
If you drive more than average — more than 14,000 miles per year — your car will depreciate faster than average. This can leave you upside-down much faster and longer, making gap insurance worth it.[2]