January 8, 2022

Everything You Need to Know About Gap Insurance

Find out whether this type of insurance makes sense for you.

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You’ll often hear that once you drive a car off the lot, it starts to lose value. If your car is totaled or stolen, standard auto insurance policies will cover the value of the car at the time of the claim. Depending on how much you put down when you financed the car, though, the settlement may not cover the total amount you owe. That’s where gap insurance comes in — or GAP, which stands for “guaranteed asset protection.”

What Is Gap Insurance?

In the event of vehicle total or theft, gap insurance covers the difference between the actual cash value of a vehicle, which your insurance settlement will pay, and what you owe on the lease or loan. (By the way, “totaled” means that the cost of repair is more than the vehicle is worth.)

In other words, because cars depreciate in value over time, your car may be worth less than what you owe. That could leave you with a big bill. Gap insurance covers the difference.

Do I Need Gap Insurance?

If you’re “underwater” or “upside down” on your auto loan, it’s a good idea to consider gap insurance. While “underwater” might sound dire, all it means is that the market value of the car is less than what you owe.

How do you know if you’re underwater?

  1. Find your car’s value by entering your vehicle’s year, model, mileage, location, condition, and accident history on the Kelley Blue Book website or the National Automobile Dealers Association’s website.1 However, there’s no single, objective source for a car’s value. Why? Because prices fluctuate with factors like industry developments and economic conditions. Check multiple sources to get a sense of your car’s worth.
  2. To determine your loan balance, subtract what you’ve already paid toward the loan from the original total loan amount.
  3. Compare the value of your car to your outstanding loan balance.
  4. If the value of the car is less than loan balance, you’re underwater (this is also known as having negative equity).

In general, consider gap insurance if you:

  • Put down less than 20 percent when you financed the car.
  • Financed for five years (60 months) or more.
  • Leased your vehicle (you’re often required to have gap insurance with a lease).
  • Bought a vehicle that loses value faster than the average, like a luxury car.
  • Rolled over negative equity from an old car loan into the new loan, according to the Insurance Information Institute.2

If you took advantage of a dealership incentive (for example, a low down payment with three months “free”), you’ll likely be underwater for several months after you purchase your vehicle.

FYI

If you took advantage of a dealership incentive, gap insurance is probably a good idea. Incentives like these tend to offer a low down payment and several months “free,” which often put you underwater for at least a few months.

Who Can Skip It?

If what you owe on your vehicle is less than what the vehicle is worth, you do not need gap insurance. In general, you can skip it if you:

  • Own your vehicle outright.
  • Put down at least 20 percent when you financed your vehicle.
  • Plan to pay off your vehicle in less than five years (60 months).
  • Own a vehicle that holds its value over time historically (for example, in 2021, Kelley Blue Book named Toyota the best resale value brand).3

How Gap Insurance Works

Let’s say you buy a new car. A month later, you get into an accident and total your car. At the time of the accident, you still owe $20,000, but the car is only worth $16,000.

You have a $500 insurance deductible, after which your collision car insurance coverage pays you the value of the car at the time of the accident. So, after the deductible, your insurance pays $15,500. But you’re still on the hook for $4,500.

Gap insurance helps you pay that difference. Typically, it does not cover the deductible. But occasionally, some gap policies cover the deductible too.

Here’s a breakdown of how gap insurance works, using that example scenario:

The amount owed at the time of the accident $20,000
Value of the vehicle at the time of the accident $16,000
Deductible $500
Insurance collision coverage pays $15,500
With gap insurance, the driver pays $500 (deductible)
Without gap insurance, the driver pays $5,000 (deductible + gap)

Keep in mind that gap insurance only pays toward the balance of the loan. If you need to replace your car, consider adding new car replacement coverage to your insurance policy.

Gap Insurance Providers

When you buy a new car, the dealership may offer to sell you gap insurance. However, buying this type of insurance through a dealer is typically more expensive than getting it through your auto insurer or a stand-alone gap insurance provider.

See if your insurance company offers gap insurance as an add-on to your current policy. Larger insurance companies like AAA, Liberty Mutual, Nationwide, Travelers, and USAA offer it. If you did buy this type of insurance from the dealer but want to switch to another provider, you may be able to remove it from your contract.

Keep in mind that most providers require you to have both collision and comprehensive coverage before you can purchase a gap policy. If your insurance doesn’t offer gap coverage, you may be able to buy it online from a stand-alone gap insurance provider. If you lease your car, check the terms of your lease — the dealership may include it automatically. And if you’re shopping around for insurance, look no further than our review of the best auto insurance companies.

GOOD TO KNOW

Buying gap insurance from a dealership is typically the most expensive route. Instead, see if your auto insurer offers gap insurance, or consider buying it from a stand-alone gap insurance provider.

Can I Get Gap Insurance After Buying a Car?

Yes, you can buy gap insurance after buying a car. Typically, gap insurance is only available when you purchase a new car, and you need to get it within three years of purchasing the vehicle.

That said, different insurers have different requirements and criteria for who can purchase gap insurance. Your best bet is to check with your provider. For example, some insurance companies require you to be the first owner of the vehicle, that you buy gap insurance at the same time you purchase the vehicle, or that the vehicle be no more than two or three years old.4

Is Gap Insurance Worth It?

If your car is worth less than what you owe, even if only for a few months, gap insurance is probably a good idea. That’s especially true if you wouldn’t be able to afford to pay off your loans in the event of an accident or theft.

In general, you can drop gap insurance after you’ve owned the vehicle for two to three years. By then, you should owe less on the loan than the vehicle is worth. When in doubt, check your loan balance against the current estimated value of the car.

How Much Does Gap Insurance Cost?

The exact cost of gap insurance depends on certain factors, like the value of your car at the time you purchased the policy, your age, where you live, and your claims history.

Buying gap insurance through your auto insurer is often the cheapest route. Most companies require you to have collision and comprehensive coverage in order to get gap insurance. With most policies, gap insurance adds only about $20 to $40 to your annual premium, or a few dollars per month. If you’re unsure about your payments, check out our frequently asked questions on how much you should pay for car insurance.

Gap insurance is usually more expensive through a dealership or the lender that financed your loan. Through a lender, expect to pay an upfront flat fee of $500 to $700 — or the dealer/lender may include gap insurance in your loan, in which case you’ll pay interest.5

What Does Gap Insurance Cover and Not Cover?

In the unfortunate event you get into an accident or someone steals your new car, gap insurance can help. But it doesn’t cover everything.

What It Covers

Gap insurance covers total loss of vehicle from an accident or theft. Keep in mind that most insurers require you have both collision coverage and comprehensive coverage to purchase gap insurance. In the case of theft, you’ll need comprehensive coverage for the insurance to pay you the actual cash value of the car.

What It Doesn’t Cover

Most gap insurance policies do not cover the insurance deductible. For example, let’s say you have a $500 deductible on your collision coverage, after which your insurance pays out the value of the car. Gap insurance will help you cover the difference between the actual value of the car and what you owe on the loan, but it won’t go toward the $500 deductible. That said, gap policies occasionally cover the deductible too.

Gap insurance does not cover missed loan payments or late fees either. If you refinance your auto loan, it usually voids your gap policy. In this case, you’ll need to buy a new gap policy.

Gap policies only cover the total loss of a vehicle from accident or theft; this does not include losses of vehicles from mechanical issues like engine failures. It also doesn’t cover bodily injuries, medical expenses, lost wages, or funeral costs.

Gap Insurance vs. Collision Coverage vs. Comprehensive Coverage

Collision insurance covers any damages the vehicle sustains while in motion, such as in a car accident. Comprehensive coverage pays for vehicle damages not related to driving. This includes theft, vandalism, falling objects, and weather-related damage.

If you lose your vehicle in one of these situations, collision or comprehensive insurance will pay for the value of your car at the time of the incident. Gap insurance, on the other hand, covers the difference between the collision/comprehensive insurance payout and your remaining loan balance.

Pros and Cons of Gap Insurance

Like any purchase, gap insurance has its pros and cons.

  • If something happens to your new car, gap insurance covers the difference between the vehicle’s value and what you owe in loans. This could mean avoiding thousands of dollars in bills at an already stressful time.

  • When you buy gap insurance through your current auto insurance provider, it usually adds only a few dollars per month in premiums.

  • Gap insurance can offer peace of mind, especially if you own a car that depreciates in value quickly.

  • Gap insurance is not available through all insurance providers. Purchasing a gap policy from a dealer or lender can be pricey.

  • If something happens to your vehicle, gap insurance does not give you money to put toward a new one.

  • You usually can’t get a gap insurance policy when you purchase a used car.

Alternatives to Gap Insurance

If you’re ineligible for gap insurance or it doesn’t meet your needs, you might consider these other options.

Loan/Lease Payoff Insurance

Some insurers use the term “loan/lease payoff insurance” interchangeably with “gap insurance.” The most notable difference is that if you buy a used car, you may be able to purchase loan/lease payoff insurance. (You often can’t buy gap insurance for a used car.) Loan/lease payoff insurance typically pays 25 percent of the actual cash vehicle of the vehicle.

For example, let’s say you paid $30,000 for your truck, and someone steals it a month later. In that time, the value of the truck depreciated to $24,000. Loan/lease payoff insurance will pay you 25 percent of the truck’s value, which is $6,000. While loan/lease payoff doesn’t pay the entire remainder of a loan like gap insurance does, it usually covers the difference or close to it.

New Car Replacement Insurance

If something happens to your new vehicle, there’s a good chance you’ll want to replace it. New car replacement insurance helps you pay for a new car (minus the deducible) to replace your former vehicle. Typically, new car replacement insurance costs more than gap insurance. It’s a good choice if you’re more concerned with the cost of buying a new car than the outstanding balance of your current loan.

Better Car Replacement Coverage

In the event of total vehicle loss, better car replacement coverage gives you money to purchase a newer model with fewer miles.6 For example, Liberty Mutual offers money toward a vehicle that is one model year newer with 15,000 fewer miles. Better car replacement coverage is a good option if you buy a used vehicle, which often isn’t eligible for new car replacement or gap insurance.

Recap

Depending on how you financed your new vehicle, it may be worth less than what you owe. When you’re “underwater” on your auto loan, gap insurance is often a good idea. To learn more, read our FAQs below. If you found this article helpful, check out more of our articles about car insurance.

Frequently Asked Questions

Still wondering about gap insurance? Read on.

Where do I buy gap insurance?

The best place to buy gap insurance is your current insurance provider or a stand-alone gap insurance company. Larger companies like AAA, Liberty Mutual, Nationwide, Travelers, and USAA offer gap insurance. Your dealership or lender may offer to sell you gap insurance when you buy a new vehicle, but this option typically costs more.

How much is gap insurance per month?

When you add gap insurance to an existing auto policy with collision and comprehensive coverage, it typically adds only a few dollars to your monthly premium, or about $20 to $40 annually. Gap insurance costs more through a dealer or lender. Usually, you’ll pay a flat fee of $500 to $700, or the dealer/lender will add gap insurance to your loan and you’ll pay additional interest.

Is gap insurance worth it?

Gap insurance coverage is usually worth it for any period of time when your car is worth less than what you owe, especially if you can’t afford to pay the difference in the event of an accident or theft. In general, you don’t need it if you put at least 20 percent down when you finance your vehicle. You can usually drop it after you’ve owned the car for two to three years; by then, you should owe less than what it’s worth.

How do I find out whether I’m “underwater” with my loan?

You’re “underwater” on your auto loan if what you owe is more than the value of your car. You can find your car’s value by checking websites like Kelley Blue Book, Edmunds, or the National Automobile Dealers Association.

There’s no single, objective source that determines your vehicle’s value, so check around. Compare the value of the vehicle to your outstanding loan balance. If the vehicle is worth less than the loan balance, you’re underwater.

Citations

  1. Consumer Vehicle Values. National Automobile Dealers Association. (2022).
    https://www.nada.com/

  2. What is gap insurance? Insurance Information Institute. (2022).
    https://www.iii.org/article/what-gap-insurance

  3. 2021 Best Resale Value Awards: Top Cars, Trucks and SUVs. Kelley Blue Book. (2021, Mar 1).
    https://www.kbb.com/best-cars/best-resale-value-cars-trucks-suvs/

  4. What Is Gap Insurance And How Does It Work? Allstate. (2020, June).
    https://www.allstate.com/tr/car-insurance/gap-insurance-coverage.aspx

  5. What’s UP with Gap Insurance? United Policyholders. (2022).
    https://uphelp.org/buying-tips/whats-up-with-gap-insurance/

  6. What is Better Car Replacement™? Liberty Mutual Insurance. (2022).
    https://www.libertymutual.com/vehicle/auto-insurance/coverage/better-car-replacement