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When Does It Make Sense To Self Insure?

When we bought our new Toyota Camry, we realized that as soon as we drove the car off the lot, it would lose a couple thousand dollars in value. But if our car got totaled, our insurance would only cover the current value of the car, not the full cost we paid for it. Some insurance companies cover this difference with ‘gap insurance,’ and in almost every case, the company selling you the car will offer this type of coverage, too.

Insuring Against Disaster

Our car insurance company actually doesn’t offer this coverage, so we were left with one option: going with Toyota’s gap insurance coverage. They offered it for around  $10 a month, but with no option to cancel it once the value of the car gets below the amount on the loan, the total came out to around $550-$600 over 5 years, which doesn’t sound bad, but when you break it down, that’s a terrible deal.

The point of gap insurance is to cover the difference between how much you owe on your car loan and how much your car is worth. On the day you drive your car off the dealer lot, that amount is at its highest (likely several thousand dollars), and it decreases over time. After about 6-12 months, the amount you owe lines up with the amount your car is worth and there is no longer a need for gap insurance. After that, gap insurance is useless because it

Why This Insurance Isn’t For Us

Sometimes, you’re able to cancel gap insurance (when you have it through your car insurance, this is the case), but when you go through the dealer (at least our dealer), you can’t cancel the insurance, it lasts for the life of the loan (even though it only has any value the first few months). To break it down, paying nearly $600 for insurance in case your car is totaled in the first 6 months is a terrible deal. It will save you a couple thousand dollars if you total the car, but if you don’t, you’re out $600 with nothing to show for it. Unless you think you have a 20% or higher chance of totaling your car in those 6 months, it’s simply not worth it.

Our Decision To Self-Insure

We decided to skip on gap insurance. It doesn’t provide enough value to us, and the cost is too high. If the car is totaled in the next 5-6 months, we’ll have to suck it up, but it won’t be the end of the world. We know the math works out in our favor and the worst case scenario is unlikely and we would be able to absorb the blow, so we self-insured in this case.

When You Should Self-Insure

In many cases, insurance is a necessary expense that must be paid. Sure, we’re unlikely to use it, but it protects against disaster. You never think you’ll suffer a terrible illness, but you never know, so you buy insurance for several hundred dollars a month. If you ever need to use it, it won’t cost you tens of thousands of dollars. Rarely do houses burn down, but without coverage, your life could be ruined if by some awful chance, it happened to you. These are perfect scenarios to get insured because you can’t afford the disaster, no matter how unlikely it is.

In the case of gap insurance, the worst case scenario wasn’t going to ruin us financially, just set up back a few thousand dollars. If you can afford the worst case scenario, it likely makes sense to self insure. We’d be out a couple thousand dollars, but that would come out of our long-term savings. In the short-term, not much would really change. And this way, we get to keep our $600, too!

Have you ever self-insured? What would you do in our case?



  1. I got Gap insurance with my car back in 2005 for $140 total. When I paid off the car in 2007, I went to the dealership and got a prorated refund of $80 for what was left of the Gap insurance term. Overall, the $60 spent for 2 years of peace of mind was an okay deal for me. This only works on $11k cars like my Chevy Aveo though, lol. The more expensive the vehicle, the higher the cost and the longer it takes to pay off.

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