If you're leasing or financing a car and it's totaled in an accident or stolen, you could wind up still paying for it even after it's gone. Gap insurance is available to cover the difference between the car's value and what you still owe, so you don't have to pay the difference out of your own pocket.
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What is gap insurance?
Also known as "guaranteed asset protection," gap coverage is an add-on to your standard car insurance that pays out if your car is totaled or stolen and you still owe more than its actual cash value. This is different from comprehensive or collision coverage, which only pays out at the vehicle's current value.
How much does gap insurance cost?
The price of gap insurance mostly depends on where you buy it. Auto insurance companies and car dealerships tend to be the two main sources of purchasing gap insurance.
It is not advised that you purchase through a dealership, however. If you get gap insurance bundled into your loan or lease through a dealership, you could pay an extra $500 to $1,000 a year, while some auto insurance providers offer gap insurance at around $5 a month.
There will be other factors involved in the cost of your gap insurance through a provider, such as the current value of your car and your personal auto insurance history. To make sure you're getting the best coverage at the cheapest price, compare quotes from multiple providers.
Find out how much you could save on gap insurance
How to calculate gap insurance
The amount of gap insurance you'll want on your financed or leased car is your remaining auto loan balance minus your car's current actual cash value. The actual cash value, or "ACV," of your car is what it is worth minus depreciation. A car starts to lose value once you drive it off the dealership, so the ACV is going to be less than what you paid for it.
As an example, say you financed a car and still owe $20,000 on it. After an accident, your car insurance provider declared it totaled. Based on its current depreciated value, your claim is paid out at $15,000. Without gap insurance, that remaining $5,000 is paid out of your own pocket.
You would want to have adequate gap insurance to cover the difference. Check the current street value of your car when you go to purchase gap insurance, as well as every year afterwards when you renew your policy while you choose to carry gap insurance.
What gap insurance does and doesn't cover
Gap insurance kicks in only if your vehicle is totaled or stolen. It's not necessary for the car to be totaled in a collision for your gap coverage to activate. Your gap insurance works with your comprehensive insurance in the event of:
- Fire
- Flood
- Hurricane
- Tornado
It's important that you're aware of gap insurance's exclusions as well. These include:
- Deductible costs
- Repair costs
- A down payment for a new car
- Overpaid loan or lease agreements
It should also be noted that if your car is found after being stolen, or is found to be repairable after an accident, gap coverage doesn't apply. If your own negligence is found to be the cause of the loss of your car, gap insurance won't cover you either.
What are the pros and cons of gap coverage?
The main advantages of gap coverage come down to the cost and the safety net it provides. The main disadvantages are that it's limited coverage and may not be available if you have an expensive car. Below is a table breaking down the pluses and minuses of getting gap coverage.
| Gap insurance pros | Gap insurance cons |
|---|---|
| Usually affordable | Probably not worthwhile with an older car |
| Provides peace of mind if you have a new car | Very specific criteria for coverage |
| No extra deductible | Some high-value luxury cars not covered |
When do you need gap insurance?
According to the Insurance Information Institute (III), gap insurance may be worth it if:
- You paid less than 20% in a down payment for your car
- Your auto loan is five years or longer
- You lease your vehicle
- You buy a car with a higher than average depreciation rate
Overall, if you're financing or leasing a new car, have a long-term loan or have a small down payment, definitely consider investing in gap insurance.
You should know that state law does not require drivers to carry gap insurance. However, if you are leasing or financing a car, your financial institution may require it.
How to buy gap insurance
Car insurance companies and auto dealerships are the two main places to get gap insurance, with insurers usually being the better of the two. Following is a table showing which of the major auto insurance providers offer gap insurance.
| Company | Offers gap insurance? |
|---|---|
| Allstate | Yes |
| American Family | Yes |
| GEICO | No |
| Nationwide | Yes |
| Progressive | Yes |
| State Farm | No |
| Travelers | Yes |
| USAA | Yes |
When looking to get gap insurance, remember that some companies call it by a different name. For example, USAA calls this offering "Total Loss Protection." Also, while some insurers do not offer gap insurance, they may offer something comparable. State Farm has "Payoff Protector," a loan agreement that cancels a customer's remaining unpaid balance after a total loss. Make sure to talk to an agent when comparing quotes to make sure you're finding the coverage you want.
Frequently asked questions about gap insurance
A few insurance companies may offer gap insurance if your car is not new, but most providers won't sell gap coverage if you own a car two to six years old, or if the car is used.
Check the declarations page of your car insurance policy. You'll be able to find if gap insurance is part of your coverage there. Also, your loan or lease documents should let you know. If you bought your car from a dealership, make sure you aren't already paying for gap insurance before you buy it elsewhere.
If you want to cancel your gap insurance, start with where you purchased it. Auto insurance companies can have different processes for removing add-ons from a policy. If you prepaid for gap coverage, check to see if you can get a refund for the unused portion of coverage paid for.
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