Why You Don’t Need Gap Insurance

If you’re leasing a car, you may be on the hook for this coverage. Otherwise, just say no.

Do I need “gap insurance” when I buy a new car? The dealer is offering it for about $600.

You may be required to include gap coverage in your monthly payments if you lease a vehicle, but otherwise you’re better off self-insuring.

Gap insurance covers the difference between the amount you owe on your car loan and the amount your auto insurance company will pay out if you total the car. Car dealers and lenders often offer gap insurance for $500 to $700, and you’ll pay interest on that amount if it’s rolled into the loan.

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Gap insurance sounds like a good idea because your car loses value as soon as you drive it off the dealer’s lot. So if you make a low down payment (less than 20%) and wreck your car soon after buying it, you could owe more on the loan than the car is worth. And if you have a long-term loan -- 48 months or longer -- it could be quite a while before your loan balance is less than the car’s value.

If you’re uncomfortable with that risk, you may be able to add gap coverage to your auto policy for less than the lender charges for stand-alone protection. You’ll typically pay 5% to 6% of the cost of your collision and comprehensive coverage for gap insurance, says Des Toups, managing editor of CarInsurance.com -- or $50 to $60 per year if collision and comprehensive cost $1,000.

You can drop gap coverage when your loan balance is close to your car’s value. Check values at KBB.com or Edmunds.com.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.