What Is Gap Insurance?

Are you financing your car? Gap insurance can help protect you if your car gets totaled. Find out how it works here.
People adding gap coverage to insurance policy

Did you buy a brand-new car? Did you take out a loan with a small down payment and still owe a lot? If you answered yes to these questions, you might consider adding Guaranteed Asset Protection or gap insurance to your policy.

What Gap Insurance Does

Gap covers the difference between what you owe on your vehicle and its actual cash value (ACV). The ACV is the price your car would sell at if you put it on the market.

Your car’s market value can be far less than what you owe. That’s because they depreciate the moment you drive them off the lot. It’ll continue to lose value every day. If your car is stolen or totaled before you pay off your loan, your insurer will only pay out its actual cash value. You could still owe the bank thousands of dollars. Without insurance, that money comes straight out of your pocket.

An important part of gap insurance is that it works together with collision and comprehensive coverage. Drivers must have the two coverages to have gap. When you’re financing, your lender will likely require full coverage anyway. Otherwise, you’d have to buy them first before looking into gap.

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How Gap Insurance Works

The main goal of gap insurance is to cover the loan on your car if it gets totaled or stolen. If you lease or own one that has a loan on it and get into an accident, you will need to cover the difference between the market value and what you owe. Your coverage will pay that difference, so you don’t have to.

This is especially useful if you have an expensive vehicle (more on that later) or have only put a small deposit down. In early ownership of a vehicle, there will be a huge difference between the loan amount and market value.

What It Covers

Gap insurance only works if a car is declared a total loss or if someone steals it. Accidents and natural disasters are what’ll total your vehicle. Here are some common examples of what it covers:

  • Theft
  • Vandalism
  • Accident
  • Hail
  • Tornado
  • Hurricane
  • Flood
  • Fire damages

Collision and comprehensive will cover up to the market value of the vehicle in these events. If your loan exceeds the market value, gap will cover it.

What It Doesn’t Cover

A common point of confusion is that gap insurance kicks in for any damage to a car. This is not true, as it needs to be a total loss or stolen. Here are a few instances where it doesn’t apply:

Generally, this coverage only applies to stolen cars or those that your insurer declares a total loss. Comprehensive and collision will cover any damages.

Guaranteed asset protection won’t pay your stolen car insurance claim if the police recover it. Nor will gap pay for any damage to your vehicle if someone steals it. Comprehensive covers these repairs if you need them.

Should I Buy Gap Insurance?

Gap coverage can be helpful and possibly even a requirement. It’s only available when you’re taking out a car loan or leasing a vehicle. Your lender may require it to protect their financial interests.

Who Needs It

While gap coverage isn’t a state requirement, some people who could use it more than others. You definitely need it if you fit into any of these examples:

  • You’re leasing a vehicle and it’s part of the contract
  • If the loan is for five years or more
  • The down payment is less than 20%
  • The market value is depreciating quickly
  • You plan on putting a lot of mileage on the car each year
  • Buying a brand-new car

Who Doesn’t Need It

Gap insurance is for those taking out auto loans, especially with very little down. But it’s not for everyone. Here are some examples of situations when you don’t need guaranteed asset protection:

  • You’ve paid off most of the loan and now owe less than the market value
  • You paid cash
  • If your car gets totaled, you can afford to take the financial hit
  • You drive a beater or low-value car

How to Buy Gap Insurance

There are several ways to add gap to your policy. When you’re financing or leasing a vehicle, the dealer may try to sell it to you. However, think twice before accepting. Dealerships usually charge more than insurers. In most cases, you’re better off talking to your agent.

How Much Does Gap Insurance Cost?

Gap only adds about $20-40 a year to your policy. This is way too cheap to pass up if you have a loan. Even so, prices do vary from company to company. So, you should shop around and compare quotes from each insurer. That way, you can find the best possible deal.

Costs also vary slightly depending on several rate factors including:

Insurance Companies with Gap Coverage

Most, but not all, companies sell gap coverage. Even so, just about every insurer offers a product with protections similar to those of gap. Below is a partial list of auto providers with a guaranteed asset protection product:

Frequently Asked Questions

Q: Is gap insurance worth it?

A: Yes, it’s worth it for a couple of reasons. One situation where it’s definitely worth it is when you owe more on a car than it is really worth. If you total a car in this case, it protects you from paying what your collision/comprehensive coverage won’t.

It is worth it if you owe a lot on your current vehicle or the market value of your car is lower than the amount of your loan.

Q: Does gap insurance pay off my loan?

A: Yes, it’ll pay off your loan. Your collision or comprehensive coverage (depending on how your car got totaled) will only cover the market value or ACV of your car. Guaranteed asset protection covers the rest of your loan if you owe more than the market value.

Q: Will gap coverage pay for any totaled car?

A: Gap won’t cover all totaled vehicles. It’s meant to cover the difference between the market value and what you still owe on the car. Only a small subset of car owners need guaranteed asset protection:

  • If you are leasing a car
  • If you are financing a car or have put very little down

People who own their car outright have no reason to buy guaranteed asset protection, as there is no loan to cover.

Q: How do I know if I have gap insurance?

In this case, it’s best to check with your agent, company, or dealership. You may have already bought it when buying or leasing your car.

Insurers may typically give you the option to buy loan/lease insurance, a form of gap coverage. It is usually a bit cheaper, but it only covers a certain percentage of your car’s market value. We recommend checking with your agent so that you can find the best coverage for your situation.

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