Why You Don’t Need Gap Insurance

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.

SEE ALSO: 5 Insurance Policies You Don't Need

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.

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.

Got a question? Ask Kim at askkim@kiplinger.com.