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 you still owe a lot? If you answered yes to these questions, you may want to think about adding Guaranteed Asset Protection (GAP) to your auto insurance policy.

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What is Gap Insurance?

Gap insurance covers the difference between what you owe on your car 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 cars depreciate the moment you drive them off the lot. Your car will 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 your car’s actual cash value. You could still owe the bank thousands of dollars. Without gap insurance, that money comes straight out of your own pocket.

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

How It Works

The main goal of gap insurance is to cover the loan on your car if it gets totaled or stolen. If you lease a car 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. Gap insurance will cover that difference, so you don’t have to.

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

What It Covers

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

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

Collision and comprehensive will cover up to the market value on the vehicle in these events. If your loan exceeds the market value, gap insurance 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 the car needs to be a total loss or stolen. Here are a few instances where gap insurance does not apply:

  • Damage to your car
  • Repairs
  • Deductibles or other expenses

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

Gap insurance won’t pay your stolen car claim if police recover it for you. Nor will gap pay for any damage to your car if someone steals it. Comprehensive insurance will cover these repairs if you need them.

Should I Have Gap Insurance?

Gap insurance can be very helpful and possibly even a requirement. Gap insurance is normally only available when you are taking a loan on or leasing a vehicle. Your lender may require it to protect their financial interests in your car.

Who Needs It

While gap isn’t a state requirement, there are some people who could use it more than others. Gap coverage is for you if you fit into any of these following examples:

  • You’re leasing a vehicle and it’s part of the contract
  • If the loan on your car is for five years or more
  • The down payment on the car is less than 20%
  • The market value of the car 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 gap car insurance:

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

If you don’t have an auto loan or drive a beater car, you don’t need gap insurance.

How to Buy Gap Insurance

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

How Much Does Gap Insurance Cost?

Gap insurance only adds about $20-40 a year to your policy. This is way too cheap to pass up on if you have a loan. Even so, prices do vary from insurance company to insurance 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:

Where to Buy Gap Coverage

Most, but not all, insurance 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 insurance providers with Gap coverage options:

  • Allstate
  • GEICO
  • Progressive
  • State Farm – State Farm doesn’t offer an auto insurance product named GAP insurance. Instead, they offer something called Payoff Protector. This serves the same purpose as GAP coverage.

Frequently Asked Questions

Q: Is gap insurance worth it?

A:  Yes, gap insurance is worth it for a couple of reasons. One reason why gap insurance may be worth it is if you owe more on a car than it is really worth. If you total a car in this case, gap will protect you from having to pay what your collision/comprehensive coverage won’t.

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

Q: Does gap insurance pay off my loan?

A:  The short answer is yes. Gap insurance will pay off your loan. Your collision or comprehensive insurance (depending on how your car got totaled) will only cover the market value or ACV of your car. Gap will cover 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. The function of gap is to cover the difference between the market value and what you still owe on the car. With this, only a couple types of people need gap insurance:

  • 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 gap insurance, as there is no loan to cover.

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

A:  In this case, it’s best to check with your insurance agent, company, or even the dealership. It’s possible that 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 insurance. It is usually a bit cheaper, but be aware that it only covers a certain percentage of your car’s market value. We recommend checking with your insurance agent so that you can find the best insurance for your situation.

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