i have gap insurance but no car insurance

Why Gap Insurance Alone Won’t Cover a Totaled Car

Gap insurance can be a smart financial protection if you owe more on your auto loan than your car is worth. But gap coverage only pays out if you have a standard car insurance policy in place too. Many drivers don’t realize that gap insurance alone is useless if you don’t also have basic auto insurance on your vehicle.

This article explains why gap insurance by itself will not pay anything for a total loss without a regular car insurance policy too We’ll also discuss the basics of how gap insurance works, when it makes sense to get it, and how much it costs.

What Gap Insurance Actually Covers

Gap insurance, also known as gap coverage or a gap policy, is designed to fill the gap between what your car is worth and what you still owe if it gets totaled. Here’s a quick look at how it works:

• You finance a new car but it depreciates quickly after purchase.

• If it gets totaled, your standard car insurance will only pay the depreciated value.

• This leaves a “gap” between that lower value and the remaining loan balance.

• Gap insurance covers the difference, up to the amount spelled out in your policy.

Without gap coverage, you’d be stuck paying potentially thousands out of pocket if your car was totaled shortly after financing it. The gap policy protects you from this by covering the remaining loan balance.

Why Gap Insurance Alone Won’t Pay for a Total Loss

Gap insurance seems straightforward. But there’s a major catch – it will only pay if you have a standard car insurance policy on the vehicle too.

Gap insurance does not act as a substitute for regular auto insurance. There would be no “gap” for it to fill if you didn’t have basic liability, collision, and comprehensive coverage.

Having just gap coverage without a standard car insurance policy would leave you totally unprotected in the event of an accident or theft. The gap insurer would pay absolutely nothing without a basic auto policy in place.

When Gap Insurance Makes Sense

Gap insurance can provide valuable financial protection but only if you also carry regular car insurance. Here are some scenarios when gap coverage is worth considering:

• You’re financing a new vehicle with a long-term auto loan.

• You’re putting less than 20% down on the purchase price.

• You expect the car to depreciate rapidly in early years.

• Your standard policy has a high deductible like $1,000 or more.

• You drive a luxury or specialty vehicle that loses value quickly.

• You have an underwater loan where you owe more than the car is worth.

Gap insurance costs vary but often range from $300 to $700 for 3 years of coverage. Shop policies offered by your auto lender, insurer, and third parties.

How Much Gap Insurance Should You Get?

Work closely with your insurance agent to determine the right amount of gap coverage for your situation. Key factors include:

• Purchase price of your vehicle

• Size of your auto loan and interest rate

• Your down payment amount

• Loan payoff timeline

• Your regular car insurance deductible

• Expected depreciation rate for your car model

• Any negative equity rolled into the loan

Make sure your gap policy limit is enough to pay the loan balance after an insurance payout, but not more than you need. This ensures you get sufficient protection at a fair price.

When Gap Insurance May Not Be Necessary

Here are some cases when gap coverage is less critical and may not be worth the extra cost:

• You’re buying an older used vehicle with a short-term loan.

• Your down payment is 20% or more of the purchase price.

• You opt for a low regular insurance deductible like $250 or $500.

• You’re leasing instead of financing the car.

• Your vehicle holds value well and depreciates slowly.

• You expect to have positive equity in the car after a few years.

Other Ways to Protect Your Investment

Beyond gap insurance, here are some other tips to minimize financial risk when buying a car:

• Put at least 20% down to avoid being upside down on the loan.

• Shop for the best interest rate on your auto loan.

• Buy a reliable model that maintains value.

• Keep your loan term shorter like 3 years.

• Pay down principal aggressively to get above water faster.

• Carry ample liability and physical damage coverage.

• Choose a low deductible like $250 or $500.

The Bottom Line

Gap insurance can provide valuable protection from financial loss if your new car gets totaled and you owe more than it’s worth. But gap policies only pay if you have standard auto insurance too. Never rely on gap coverage alone without basic car insurance. Work with your agent to ensure you have ample protections for your unique situation and risk factors.