Gap insurance is a type of optional auto insurance coverage that helps pay the difference between what your car is worth and what you still owe on your loan or lease if your vehicle is totaled or stolen.
What is Gap Insurance?
Gap insurance, also known as loan/lease coverage, is designed to pay the gap between your primary auto insurance payout and the remaining loan balance if your vehicle is deemed a total loss.
For example, if you owe $20,000 on your car loan but your car is only worth $15,000 at the time it’s totaled, your insurance company will only pay you the $15,000 actual cash value. Gap insurance would cover the $5,000 difference, so you don’t end up owing money on a car you no longer have.
Gap insurance makes sense for drivers who have an auto loan or lease that exceeds the actual cash value of their vehicle. This situation is common when you finance a new car that quickly depreciates or if you roll over negative equity from your previous auto loan.
How Does Gap Insurance Work?
Gap insurance only pays if your vehicle is declared a total loss from an incident covered by collision or comprehensive insurance. Here are the steps for filing a gap insurance claim:
- You make a claim under your collision or comprehensive car insurance policy. Your insurer determines your vehicle is a total loss and pays the lender the actual cash value minus your deductible.
- If you owe more on the loan than your car’s value, there’s a gap. Your gap insurance policy covers the difference between the settlement amount and the remaining loan balance.
For example:
- You owe $18,000 still on your car loan
- Your car is totaled and determined to be worth $12,000
- Your collision insurance pays the lender $11,500 ($12,000 value minus your $500 deductible)
- Gap insurance pays the lender the remaining $6,500 you owe
- You don’t have to pay anything out of pocket
Without gap insurance, you’d be responsible for the $6,500 difference. Gap insurance protects you from this expense.
When to Consider Gap Insurance
You may want to purchase gap insurance if:
- You made a low down payment of less than 20% when financing your vehicle. With little equity, you are more likely to owe more than it’s worth if it’s totaled shortly after purchase.
- You have a long-term auto loan of 5 years or more. It takes longer to build equity to eventually have the loan balance match the depreciating car value.
- You leased your vehicle. Gap insurance may be required by the lease terms.
- You have poor credit, so you took a loan with a higher interest rate. Higher rates mean slower equity building.
- You rolled over negative equity from your last car into the new loan.
- You drive a model that depreciates faster than average, like a luxury or sports car.
Essentially, if you currently owe more on your auto loan than your car is worth, gap insurance can provide valuable financial protection.
READ ALSO: Auto Insurance Rates By State in 2023: A Comprehensive Analysis
What Gap Insurance Covers
Gap insurance through your car insurance company will cover:
- The difference between your car’s value and your remaining loan balance if it’s totaled.
- The difference between your car’s value and remaining lease payments if it’s totaled.
- Theft of your vehicle.
Gap insurance purchased at a dealership may also cover:
- Your deductible amount is for comprehensive or collision coverage.
- Certain finance fees are associated with your loan.
- Sales tax for leases.
However, policies vary, so read all documents carefully. Gap insurance will never cover injuries, damage to other vehicles or property, extended warranties, overdue payments, lease termination fees, or new down payments.
Does Gap Insurance Cover a Stolen Car?
Yes, gap insurance also applies if your car is stolen and not recovered. As with a total loss, your insurance company will pay the actual cash value minus your deductible. If you still owe more than that amount, gap insurance will cover the difference.
When is Gap Insurance Required?
Gap insurance is optional but may be required if you lease a vehicle or finance with little money down. Carefully review your lease or loan terms to see if gap coverage is mandatory.
If not required, gap insurance still provides valuable protection from potential financial loss. Even if you put 20% down when financing, rapid depreciation could still leave you owing more than it’s worth.
Where to Get Gap Insurance
You can get gap insurance from:
- Your auto insurance company – This is often the most affordable option. Many insurers, like Progressive, State Farm, and Geico, let you add gap as a policy endorsement.
- Car dealerships – Dealers may offer gap insurance during the buying process. But it will likely cost much more than going through your insurer.
- Banks and credit unions – Your lender might also offer gap insurance when you finance your car. Again, compare pricing.
If required for a lease or loan, you may have no choice on where to buy gap coverage. But if optional, compare quotes from insurance companies or your financial institution to find the best rate.
How Much Does Gap Insurance Cost?
According to Forbes Advisor, the average annual cost for gap insurance is:
- From an insurance company: $61
- From a car dealership: $500-$700 one-time fee
Actual pricing depends on your location, age, driving record, vehicle type, loan length and amount, and more. Gap through your insurer is usually the cheapest, costing $20-$150 per year added to your policy.
Dealerships typically charge a flat fee ranging from $300-$900. The benefit is that gap coverage starts immediately with dealer financing. Waiting until your policy renews could leave you unprotected for a short time.
If buying from a dealer, avoid rolling the cost into your auto loan. Paying interest on gap insurance decreases the value.
Pros and Cons of Gap Insurance
Gap insurance helps alleviate financial loss but also adds cost. Consider the pros and cons when deciding if it’s right for your situation.
Pros of Gap Insurance
- It covers the difference between your car’s value and loan balance, if totaled
- Protects from owing money on a car you no longer have
- Covered theft of your vehicle
- No deductible like your primary policy
- Relatively low costs when added to an existing policy
Cons of Gap Insurance
- Added monthly or annual expense
- Limits flexibility if required due to financing terms
- You might not get a refund if you cancel the policy early or pay off loan quickly
- Doesn’t cover extended warranties, injuries, or other vehicles/property
For most people financing a new vehicle with low down payments, the protection far outweighs the small premium cost. But if you put 20% or more down and have a short-term loan, you may not need the extra coverage.
When Can You Cancel Gap Insurance?
You can cancel gap insurance anytime by contacting your insurance company or lender (if they provide it). Expect a prorated refund based on the remaining months of your policy term.
However, if you rolled your gap premium into your car loan, you likely cannot cancel it until the loan is paid off. Doing so would leave you without coverage but still paying interest on the gap insurance.
Once your loan balance matches or drops below your car’s value, it’s safe to cancel gap coverage. Check Blue Book or Edmunds regularly to estimate your car’s worth as the loan balance decreases.
Alternatives to Gap Insurance
Some other types of coverage can provide benefits similar to gap insurance:
New Car Replacement – Pays to replace your totaled newer car with a brand new one instead of paying actual cash value. Offered by companies like Amica, Farmers, and Nationwide.
Better Car Replacement – Reimburses enough to get a newer model of your totaled vehicle. Offered by Horace Mann and Liberty Mutual.
These options may be more limited than gap insurance. Carefully review coverage amounts, eligibility requirements, and deductibles before relying on them as a gap insurance alternative.
To Recap
Gap insurance can provide valuable financial protection if you owe more on your vehicle than it’s current value. While not mandatory, gap insurance makes sense for many drivers who finance or lease their cars. Lower costs through regular insurers make a gap an affordable option to hedge against a potential shortfall if your vehicle is totaled or stolen. Review your coverage needs any time you purchase a new vehicle to ensure you have adequate protection.
Gap Insurance FAQs
How does gap insurance work if I total someone else’s car?
Gap insurance only covers damage to your own vehicle. If you total someone else’s property or car, liability insurance pays for those damages. Gap insurance does not apply to any claims for damage to other vehicles or property.
Does gap insurance cover a blown engine?
No, gap insurance does not cover mechanical breakdowns or failures. The only situations in which gap insurance applies are theft of your car or it being declared a total loss due to collision or comprehensive damage. For engine repair, you would need an extended warranty or coverage under your regular auto policy.
Can I get gap insurance after I purchase my car?
In most cases, yes. Many insurance companies allow you to add gap insurance within 30 days of leasing or financing your car. This gives you time to review your coverage needs after driving the new vehicle. Some lenders may require you to prove you have a gap shortly after the purchase.
If my car is repaired, can I get money from gap insurance?
No, gap insurance will not pay anything if your vehicle is repaired after an accident. It only covers the difference between your car’s value and loan balance if the car is a total loss. Minor damage that is fixed does not qualify for a gap insurance payout.
How much does gap insurance pay if my car is totaled?
The gap insurance payout is the difference between what your car is worth at the time of the total loss and what you still owe on your loan or lease. For example, if your car is worth $10,000 but you owe $15,000 at the time it’s totaled, gap insurance will pay $5,000.
What happens when gap insurance runs out?
Gap insurance from your auto insurer does not really “run out” – it remains active until you cancel it. Gaps through a dealer may expire after a set time frame, leaving you unprotected. Avoid this by adding a gap to your regular policy. Once your loan balance drops enough, cancel so you don’t overpay.
Can I get a refund from my gap insurance?
If you cancel your gap insurance before it expires, you can get a prorated refund based on the unused portion of your policy term. However, if you financed gap through your dealer, you likely cannot cancel it until the loan is paid off. Paying interest on the coverage decreases the value, so avoid financing gap insurance.
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