In the U.S., a new car's actual cash value depreciates by up to 30 percent in its first year and 50 percent by the third year, according to the website Edmunds. If your car is totaled, this can mean a huge chunk of missing cash at claim time. To protect drivers against this financial loss, many insurers offer gap insurance, which is usually available over the life of the car loan or lease.
Different Insurers, Different Rules
When purchasing gap insurance, the insurer will dictate the terms of the gap coverage. Most insurance companies will provide this coverage at any time during the life of the car loan, and the actual coverage will end when you drop the insurance or the car loan or lease period ends. That said, not all insurers offer gap insurance, and some may have purchase stipulations. For example, some insurers will only offer it if you already have comprehensive and collision, while others will make you wait 11 months into the life of the car loan.
When to Buy
The best time to buy gap insurance is at the start of your car loan, suggests the website Insure.com. As your car leaves the dealership, you have the least amount of money invested in the car, and the actual value of your car will depreciate the quickest during the first year. Your first offer to purchase gap insurance may actually come from the car dealership, but the website Bankrate warns that this will cost you more than most insurance companies and therefore should be declined.
When to Drop
You should consider dropping gap insurance in the fourth or fifth year of your car loan, which is the general time a car's actual cash value comes in direct alignment with its actual worth. If you bought your vehicle with a hefty down payment or were able to make additional or higher monthly payments, this date may come sooner. For a link to the Kelley Blue Book, which can help you find the actual value of your used vehicle at any time, see Resources.
When it comes to leased cars, your dealer's lease agreement may include gap insurance as part of your monthly payment, so it's a good idea to check before adding the extra expense. Depending on your lease agreement, your gap insurance coverage may be contingent upon your compliance with the lease, so make sure to read the fine print.