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If you lease or purchase a new car with a loan, you might want to consider obtaining the extra financial protection known as gap insurance. In the event the vehicle is stolen or totaled in an accident, this specialized coverage pays the difference between what you owe on the loan and the compensation your primary insurer will offer you. For more on this, see Do Drivers Really Need Gap Insurance?

While gap insurance can be a good idea if eat up a lot of miles on the road or have a model that’s known to depreciate quickly, be careful about where you buy it. The dealership may try to sell you its own policy, but that is likely to end up costing a good deal more than going with an outside carrier.

Gap Insurance Basics

The idea behind gap insurance is to provide a safety net for drivers who are underwater on their loan – in other words, they owe more than the car would be worth on the used market.

Because cars lose a significant amount of value the moment you pull off the lot, having negative equity is actually quite common in the early years of a car loan. According to Edmunds.com, the worth of the average car drops by about 19% after just one year of driving. After the second year, it typically loses another 12%.  Unless you have a short-term loan, it can be difficult to keep the loan balance below the vehicle’s market value during these early years.


Gap insurance makes up for this shortfall. Let’s say you have a sedan that you bought for $30,000. A year later, you get into a major collision and the car is declared a total loss by the insurance company. With traditional coverage alone, the primary insurer will reimburse you for the “actual cash value” of the vehicle, which is $24,000. Unfortunately, you still owe $26,000 to the lender. If you have a gap policy, it will cover the remaining $2,000 to help you retire the loan. For more on this, see Get Up To Speed On Car Gap Insurance.

Know Your Options

Drivers who lease a car may have gap insurance built into their contract. But if it’s not included with the lease, or you’re purchasing the automobile with a loan, you can do some shopping around.

Experts say you’re generally better off going with one of the major insurance companies than getting it from your car dealer. Dealerships typically charge a flat fee between $500 and $700 for gap coverage – and it could go higher still if the premium is combined into the loan.

One place to start for a more competitive rate is the company that already insures your car. Several big-name insurers offer a variant of gap protection – including Esurance, Progressive and Nationwide.  Ordinarily, they’ll bill you between 5% and 6% of your collision and comprehensive premium. So if you pay $1,000 for these two components, gap coverage will amount to roughly $50 or $60 a year in addition.

Keep in mind that depreciation is most aggressive when cars are relatively young, so you may only need gap insurance for two or three years. When you go with a major insurer, you can usually cancel the policy once you start to build equity, thus lowering your bill. It’s a good idea to periodically check the NADA Guides or other valuation sources to make sure you’re not paying for coverage you don’t need.

Some specialty insurers also provide gap insurance.  If you choose to go this direction, just make sure the company has a strong financial rating from A.M. Best, as well as a favorable grade from the Better Business Bureau.

Some Policies Don't Cover the Full Gap

Perhaps the biggest caveat when price-shopping among different insurers is that not all gap policies are the same. For example, some companies, including Progressive, refer to their offering as “loan/lease” coverage.

The main distinction is that loan/lease policies put a cap on the payout. Typically, the company reimburses up to 25% of the car’s cash value at the time of the accident or theft. Most of the time, this won’t make a huge difference, except for those who are deep underwater on their loan.

As an example, say you crash an SUV that’s currently worth $20,000 and you still owe $30,000 on your car loan. Rather than pay the full $10,000 difference, loan/lease protection entitles you to just $5,000 (25% of the SUV's $20,000 cash value).

To be on the safe side, go over the policy details before taking out gap coverage, and ask a representative to explain exactly how the coverage works, with specific examples such as the one above.

The Bottom Line

Gap insurance plays an important role for drivers who have significant negative equity in their automobile. Just remember: It pays to shop around rather than blindly accepting what the dealer has to offer. 

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Steer Clear of Overpriced Gap Insurance Providers

When Alex Grebe signed up for term life insurance, he lied. The 28-year-old stated that he is tobacco-free. "I know not to tell insurers the truth," said the Manhattan resident, who smokes cigarettes. Grebe only pays $50 a month for his term life insurance, but had he revealed he was a smoker, he would have paid more than three times as much as a non-smoker for the same policy, according to a new InsuranceQuotes.com report.

A 45-year-old nonsmoking woman pays $544 per year for a term life policy with half million in coverage for 20 years but with a smoking habit, her rate goes up 269 percent or $2,600 a year.

"Smoking causes one in five deaths in the U.S. and has been linked to many diseases like diabetes, lung and heart disease which are the three health issues that we know about," said Laura Adams, senior analyst with InsuranceQuotes.com. "This is something insurers watch closely."


Of course it's hard for insurers to know when people like Grebe lie about theirsmoking habit. "I named my younger brother as the beneficiary," he said. "He needs the money."

Will the Insurance Company Find Out?

Chances of an insurer inquiring about a death are low unless it's suspicious. "Insurers wouldn't have a reason to know a policy holder smokes unless they investigate," Adams said. "This only happens when there's a question about the death or if the policy is worth more than $1 million."

One way an insurer could determine whether a smoker is fibbing is by requiring an annual physical. "But that would be up front," said Adams. "It's not something they can surprise you with."

Blood work that could detect nicotine is typically not mandatory for term life policies, which can be part of a policy's appeal. "Insurers are probably charging higher rates to adjust for the risk that an applicant is lying when they approve you without a physical. It's a gamble that the insurers are aware of," said Adams. "Insurers create statistical models that forecast how long an applicant is likely to live."

Regardless of whether an applicant smokes or not, insurance rates rise as people age. A 35-year-old pays 27 percent more than a 25-year-old for the same coverage, and 45-year-olds pay 120 percent more than 35-year-olds. "You can save a lot of money by getting life insurance while you're young," Adams said. "By locking in a level-term policy in your 20s or early 30s, you will benefit from much lower rates while protecting your loved ones for decades to come."

How Bold Smokers Can Get Life Insurance for Less: Just Lie

Sometimes it seems the insurance industry believes that buying a life insurance policy in one form or another is a cure for any financial ill. To be clear, life insurance is a part of many properly constructed financial plans. Many of us need to provide this protection for our families in the event of an untimely death. Parents, and anyone who provides support for someone else, might consider life insurance protection.

Life insurance can also be used for estate planning purposes or as a vehicle to ensure that a business can continue to operate in the event of the death of an owner or key employee.

My beef, however, is with life insurance marketed as an investment, most often as a retirement investment vehicle. To say the life insurance folks are inventive and creative marketers is an understatement.

A typical scenario.
Life insurance is often marketed to high-earning professionals and business owners as a means to put away additional funds for retirement over and above any type of retirement plan they might already have, such as a 401(k).

The pitch is this: buy a policy with underlying investment vehicles that will build cash value over time. The client funds the policy for certain number of years and the growth in the cash value will eventually negate the need for additional premiums. At retirement the client can withdraw cash as a tax-free loan for retirement. The loans never need to be repaid and the only consequence is a reduced death benefit.

What could go wrong?
While the above scenario can work, it is far from the “slam dunk” opportunity portrayed by some agents and other financial salespeople. Among the things that could derail this strategy:
  • The investments don’t perform as well as assumed in sales illustrations.
  • The policyholder can’t fund the policy to the level anticipated.
  • The policyholder withdraws too much cash from the policy and triggers a taxable event.
Additionally, investing under a life insurance wrapper can be terribly expensive and there are generally surrender charges written into such policies that can make it very expensive to get out of a policy early or convert it to another saving or investment vehicle, often for a number of years.

Consider alternatives.
If you are pitched a plan to use life insurance as a retirement investment make sure that you have reviewed and exhausted all other alternatives first, including:
  • Fully funding a qualified retirement plan including a 401(k) or SEP-IRA.
  • Starting a pension plan for yourself. This includes a cash balance plan.
  • Funding a low-cost, no-load variable annuity.
Even if you find that this life insurance strategy is the best course of action make sure that you shop policies and companies. You will want to look at the quality of the underlying investment and understand all underlying fees and expenses.

If you buy a policy, make sure that you continue to monitor it. Set aside money to fund it, watch the performance of its underlying investments, and be sure withdrawals won’t a trigger a tax penalty?

Life insurance can help provide financial security for your family. However, if you buy it for any reason other than the death benefit, make sure that the policy fills the alternative role in the best possible fashion before writing your first premium check.

Is Life Insurance a Retirement Investment?

If you're not already covered though your employer, dental insurance can be really expensive, costing an average of $400 annually for an individual plan and $1200 annually for a family plan. Luckily, there is another budget-friendly option available.

Joining a Dental Price Club will give you access to a large network of dentists at discounted prices, typically up to 60 percent off the market rate. There are no copays. Instead, you pay a membership fee of around $75 to $150 for an individual plan, while family plans will cost about $50 more.

Along with the low prices, there are other distinct advantages: Dental clubs can really save when it comes non-routine services, such as root canals, cavity fillings and tooth extractions. For example, the industry standard for a single tooth extraction runs around $167. Through a club, that same procedure will only cost about $81 dollars. That's a savings of over 50 percent. If you were to do this though dental insurance, you would potentially be paying a copay of up to 60 percent of the total bill, especially for major restorative work.

Joining a club can also get you discounts for cosmetic dental work, which dental insurances typically don't cover. You can typically save up to 25 percent off veneers and braces, while full dentures can be up to 50 percent off, depending on your coverage.
Another bonus with dental clubs is that there's no waiting period. Your coverage begins immediately upon sign up, whereas for dental insurance, you might have to wait anywhere between 3 and 18 months before getting any major work done.

To find a dental plan, check out DentalPlans.com. You can find a great comparison chart of all the top plans including DentalSave, Careington and Brighter. Once you choose your plan, go directly to the provider's website to sign up to avoid paying extra processing fees.


In the end, joining a dental club can potentially save you big, especially if you're looking for more cosmetic and non-routine services. This way you can still take good care of your teeth, and have your budget shine as well.

How to Save on Dental Insurance

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