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Gap insurance

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Guaranteed Asset Protection (GAP), or gap insurance, is an optional coverage that drivers can add on to their existing car insurance policy. If you are a driver with a loan on a new vehicle, it could protect you from having to pay back your loan if you owe more than the car’s depreciated value after your car is totaled or stolen in a covered loss.

What is gap insurance?

Gap insurance is optional car insurance endorsement that covers the “gap” between the amount owed on a vehicle and its actual cash value (ACV) in the event it is totaled, stolen or rendered a total loss from a covered claim. Although gap insurance is an option in most cases, if you have a loan or lease contract on your vehicle, your financial lender may require you to carry it.

Here’s how gap insurance works: say you have been involved in an accident and your vehicle has been damaged beyond repair and must be replaced. You still owe $18,000 on your auto loan, but the vehicle is now worth only $15,000. Gap insurance would cover the $3,000 difference between what you owe on your car and its current market value, after accounting for deductibles. Some policies also cover the deductible, but this is not always the case.

Remember that gap insurance typically applies only to vehicles that are brand new, or models less than a year old, that have been totaled or stolen. It does not cover accidents, damages, repairs or a sale or trade-off, even if the financed amount is higher than the value of the vehicle. It will also not help buy you another vehicle — you would need new car replacement coverage to cover the expenses of a new vehicle.

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How much is gap insurance?

The cost of gap insurance is influenced by several factors such as your vehicle’s actual cash value (ACV), where you opt to purchase the coverage, your past insurance claims and the insurance provider you select. According to the Insurance Information Institute (Triple-I), adding gap insurance to a full coverage auto policy costs about $20 per year. However, this is not a set rate, and individual rating factors like your vehicle’s value can influence the cost.

It’s generally more cost-effective to purchase gap insurance from your existing insurance provider rather than from a car dealership or lender. Car dealerships tend to charge more for gap insurance, and adding it to your auto loan could mean you need to pay interest on it — which can cost more in the long run. To ensure that you’re getting a good deal on your coverage, compare what you’re quoted from your car insurance provider and your dealership.

Does gap insurance always pay out?

Gap insurance is designed to cover the monetary difference between the actual cash value of your vehicle and the remaining amount on your loan or lease if your vehicle is stolen or declared a total loss. However, it’s important to note that gap insurance is specifically focused on this “gap” and does not extend to other expenses such as personal injuries, vehicle repairs or damages to other vehicles. It’s also worth keeping in mind that gap insurance only comes into play when the loss of your vehicle creates a “gap” where the balance remaining on your loan or lease surpasses the actual cash value of your car.

When does gap insurance not pay?

While it’s an invaluable financial safeguard for drivers who owe more on their car than its market value, there are certain circumstances where gap insurance won’t provide a payout. These include:

It’s also worth mentioning that gap insurance typically does not cover deductibles unless it is explicitly stated as a provision for deductible reimbursement in the policy.

Where to buy gap insurance

Some auto insurers, like Geico, do not offer gap insurance, while others vary in how this protection is offered and how it works. Here’s a quick look at a few options:

Is gap insurance worth it?

Gap insurance is generally recommended by lenders or auto insurance companies for new vehicles when or if:

It is generally recommended to compare what you will pay for your car over the life of your financing to the car’s MSRP or agreed-upon sales price and see if you have a gap from the start. In the event you do, gap insurance may be a good idea.

Keep in mind your “gap cost” is always fluctuating. Generally, the difference between what you owe and what the vehicle’s worth shrinks as you make monthly payments and as the car depreciates.

Other situations in which gap insurance might not be necessary:

You can cancel the coverage at any time — typically recommended only once the amount owed on the vehicle is less than its market value. If you are unsure of whether gap insurance is worth it, consider the risk. Gap insurance is fairly inexpensive and, in many cases, can be added to your existing full coverage policy for a nominal cost per year. That may be far less than the difference between your car’s value and what you owe in case of a major accident.

Gap insurance for leased cars

Like any car or SUV, leased vehicles depreciate quickly. Therefore, if you did not put much money down and still owe a sizable amount on your total lease payment, you will likely owe more than the vehicle is worth if you get into an accident. In this situation, gap insurance coverage for your lease might be a smart financial decision.

As with a purchased car, it may help you to compare your total cost — including taxes and anything else you rolled into the lease — to the vehicle’s MSRP to determine if you have a gap.

And just like a purchased vehicle, the difference between what you owe and what the car’s worth decreases as you make monthly payments and as the car depreciates. This means you may not need the coverage for your entire lease period. You may only need it for a few months, depending on your lease agreement.

What are some alternatives to gap insurance?

While gap insurance offers a crucial financial safeguard, there are other options that you might want to consider. These include:

These alternatives each offer distinct advantages and disadvantages compared to gap insurance, and the best choice depends on your specific circumstances and needs. Always ensure to weigh the costs and benefits before making your decision.

Frequently asked questions

How do I get the best deal on gap insurance?

Do you get money back from gap insurance?

How does gap insurance work if your car is totaled?

Do I need gap insurance if I have full coverage?

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