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Do I need gap insurance if I have full coverage?

I am supposed to get full coverage auto insurance for my new car and the bank is offering me gap insurance along with my loan. Is it advisable to get it, or is my auto insurance enough? What is the difference between the two?

Mar 22, 2023 Detroit, MI

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Beth Swanson

SEO Content Strategist

Credentials
  • Licensed Insurance Agent — Property and Casualty

Beth joined The Zebra in 2022 as an Associate Content Strategist. She is a licensed insurance agent whose goal is to make insurance content easy to r…

Thanks for reaching out to The Zebra! Let's dive into your question and provide some clarity.

First, whether or not you need gap insurance depends on a few factors: whether or not the car is brand new, how much of a downpayment you put down, how well it holds its value, and whether or not gap insurance is a requirement for your specific loan or lease (check the loan contract).

The difference between gap insurance and full coverage insurance is:

  • Full coverage insurance combines liability, collision, and comprehensive coverages to provide extensive protection for the policyholder in case of accidents, theft, or damages
  • Gap insurance is meant to cover the difference between what your standard insurance policy would pay out in the event of a claim (market value of the vehicle), versus what you actually owe on the vehicle. Let's look at an example of when this would come into play, even if you already have full coverage.

According to Kelley Blue Book, new cars lose about 20% of their value within the first year and can depreciate as much as 60% in the first five years. Let's say you buy a luxury sedan, brand new, for about $88,000 ( a base model BMW series 7). The BMW series 7 luxury sedans are one of the highest depreciating cars today, according to Forbes. After a few years, the market value is $49,500 and you have a $500 deductible when your car is in an accident and declared a total loss. Your insurance company will pay you the market value minus your deductible. If you still owe $68,000 on your loan, gap insurance would help cover the difference of $19,000 that you'd still owe. Really, whether or not you need gap insurance depends on a few factors: whether or not the car is brand new, how much of a downpayment you put down, how well it holds its value, and whether or not gap insurance is a requirement for your specific loan or lease (check the loan contract).

It's important to remember that gap insurance is designed to work with your comprehensive and collision coverage, not as a substitute. The dealership is likely to offer you gap insurance when you buy the vehicle, but it tends to be cheaper if you can get it through your current car insurance company. It might be a minimal cost if you've already got collision and comprehensive coverage.

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