What Is Gap Insurance?

So, what is gap insurance coverage? When you buy a car with a loan, the value of it drops quickly over time. And unfortunately, if an accident totals it, standard auto insurance covers only its actual cash value (ACV). But what if you owe more? That’s where gap coverage helps. For example, you owe $30,000, but your full coverage auto insurance pays you $26,000 after depreciation. Gap insurance covers the $4,000 difference.

What Does Gap Insurance Cover?

So, you already understand what Guaranteed Asset Protection (GAP) insurance is. But what does exactly gap insurance for automobiles cover for you? It fills the financial gap between what your vehicle insurance pays after an accident, theft, or total loss, and what you still owe on your loan or lease. Standard auto insurance only covers your vehicle actual cash value (ACV), which accounts for depreciation. If your loan balance is higher than your car’s ACV, gap coverage kicks in to cover the differences.

Here's what gap insurance covers:

• If a crash leaves your car beyond repair, your insurance policy pays the ACV. If you owe more than that, gap coverage covers the remaining balance.
• If your vehicle is stolen and not recovered, vehicle insurance pays its market value. And, gap insurance covers the outstanding loan balance.
• Some cars lose value faster than others. If your car loan exceeds its worth early on, gap coverage prevents financial loss.
• If you rolled over debt from an old loan, your loan balance may be higher than your vehicle’s value. Gap insurance can help cover this difference.
• If you put down less than 20% on your lease or loan, your equity is low. Gap insurance protects you from owing more than the vehicle’s ACV.
• With longer loan terms, your vehicle depreciates faster than your loan balance decreases. Gap coverage keeps you from paying thousands out of pocket.

What Gap Insurance Doesn’t Cover?

Anyone who has financed a vehicle can benefit from having gap insurance coverage. But that doesn't mean it covers everything you dream for. Here’s what it won’t pay for:

• Your deductible: Some policies cover it, but many don’t. You’ll need to check your insurance policy.
• Missed or Late Payments: If you fall behind on your loan or lease, gap insurance won’t cover the extra balance.
• Extended Warranties and Add-Ons: Features like service plans, rustproofing, or custom upgrades aren’t included.
• Down Payment for a New Car: Gap insurance clears your old balance, but it won’t fund your next vehicle purchase.
• Rental Car Fees: If your vehicle is in the auto repair shop, you’ll need rental car reimbursement from a separate insurance policy.
• Mechanical Failures or Repairs: Gap insurance applies only to total loss situations, not maintenance or breakdowns.  
• Cash Reimbursement to You: The payout goes directly to your creditor to settle the remaining loan but not to you.

Also keep in mind that gap insurance won’t cover collision-related damage, accidents, animal collision, natural disasters (e.g., fire, flood, hail damage, storm, earthquake), or vandalism. You must have full coverage auto insurance for that, which is usually mandated by your lender. 

How Does Gap Insurance Work?

Gap insurance helps you if your financed vehicle is declared a total loss due to an accident or theft. If you only maintain full coverage auto insurance, it will only pay you the actual cash value (ACV), which factors in depreciation. According to Kelley Blue Book (KBB), a new car on average depreciates 30% over the first two years. This means there’s a huge chance that if your car gets totaled in its first two years, you’re more likely to pay out of pocket for the remaining auto loan. Fortunately, if you have gap insurance and your loan balance is higher than ACV, you don’t have to break the bank.

Let’s simplify this for you:

• You buy a car with a loan or lease
• The car depreciates as soon as you drive it off the lot
• After an accident or theft, your auto insurance policy pays only the ACV
• If your loan balance is higher than the ACV, you owe money
• Gap insurance covers that negative equity, so you’re not paying out-of-pocket

Example of How Gap Insurance Works

Let’s say, you financed a new car. A year later, an accident totals it. Your vehicle insurance covers only its current cash value, not your full loan balance. In a situation like this, here’s how gap coverage steps in:

When You Might Need Gap Insurance Coverage?

Not everyone needs gap coverage. However, in certain situations, it’s highly recommended. According to the Insurance Information Institute (III), GAP Insurance is worth considering if any of these apply to you:  

• You made a down payment of less than 20%.
• Your loan balance is higher than your vehicle’s value.
• You financed your car for 60 months or longer.
• You rolled negative equity from an old loan into a new one.
• Your vehicle depreciates faster than average.
• You leased your vehicle, and your lease agreement requires it.
• Your creditor requires it as part of your finance contract.

Learn More: When does gap insurance not pay?

How Much Is Gap Insurance?

The cost of gap insurance depends on several factors, with the most important being where you purchase it. If you buy it from a car dealership, it may cost between $400 and $700, and it could go up to $1,500. This amount is charged as a one-time payment. Since buying it from a car dealership is considered highly expensive, insurance professionals do not recommend it.

In fact, purchasing your auto insurance policy and gap insurance coverage from the same provider could save you a lot. According to Insure.com, a borrower pays an average of $7.50 per month or $90 per year for gap coverage. Based on our research, if you choose an auto insurer for gap coverage, you’ll pay around $20 to $100 per year or roughly $2 to $20 per month as an add-on to your insurance policy.

However, these are some average estimates for gap coverage. As we said, several key factors can affect the cost of your gap insurance:

• Your vehicle’s actual cash value (ACV)
• Your loan balance and finance terms
• Your zip code and state laws
• Your insurance provider and their pricing structure.

Gap insurance is meant to be used with comprehensive and collision insurance coverage, which together are called a full coverage policy. So, the cost for gap coverage will be added to your full coverage car insurance cost.

Whether purchased from a dealership or an insurance agency, gap insurance from an insurance carrier is usually cheaper than from a creditor or dealership. Policyholders are advised to insure their vehicle for gap insurance with the same provider as their other auto insurance policies.

For instance, if you have purchased affordable full coverage auto insurance from L.A. Insurance, you’ll receive a cheaper quote for gap insurance. Since L.A. Insurance is the most affordable insurance agency for any kind of reliable coverage, you can contact one of our friendly insurance agents or dial us at (800) 893-9393. 

How Long Does Gap Insurance Last?

Gap coverage lasts until your loan balance is lower than your vehicle’s ACV. This usually happens within two or three years of financing a vehicle, depending on how fast you pay off your loan and how quickly your vehicle depreciates.

You should cancel gap insurance when:

• You owe less than your vehicle’s actual cash value.
• You paid off your loan completely.
• Your lease contract ends.

Related Article About Gap Insurance: Can I Cancel Gap Insurance?

Is Gap Insurance Mandatory?

Gap insurance isn’t legally required. However, it could be a requirement for you if you have a financed or leased vehicle. Some creditors and leasing companies may want you to carry it as part of your loan or lease agreement. Especially, if you finance a vehicle with a very little or no down payment, your lender might insist on gap coverage to protect their investment.

However, even if it’s not required, Guaranteed Asset Protection (GAP) Insurance could be a wise investment, particularly in a situation when your outstanding loan amount is higher than your vehicle’s actual cash value (ACV).

Where to Buy Gap Insurance?

You can buy gap insurance from:

• Car dealership. They often charge an expensive one-time fee, which is added to your loan amount as a lump sum.
• Auto insurance companies. They are the most affordable when it comes to gap insurance. You might have to pay only $20 to $100 per year if you add it to your full coverage insurance policy from the same provider.
• Bank and credit unions. They offer gap insurance only if you finance your vehicle through them.

Here, if we must give you a final verdict, you should buy gap insurance from a car insurance company. They are the most affordable and reliable option if it comes to offering gap insurance. Plus, auto insurers have comparatively more experience in providing all types of car insurance coverage.

Is Gap Insurance Worth It?

If you owe more on your loan than the vehicle’s current market value, then yes, gap insurance is worth it. The situations it covers, especially total loss, are crucial and support you financially when you have already lost your investment in your vehicle.

However, you might not need it, or we could say gap insurance might not be worth it if you have made a large down payment of 20% or more. Also, if you owe less than your vehicle’s cash value, or your loan term is short and you’re paying it off quickly, gap insurance isn’t necessary.

Frequently Asked Questions (FAQs)

How do I claim for gap insurance on my car?

First, file a total loss claim with your auto insurance provider. Once they pay the actual cash value (ACV), submit a Gap insurance claim with your insurance agency. Provide documents like your loan balance statement and settlement details.

How do I know if I have gap insurance?

Check your auto insurance policy, loan contract, or lease agreement. Many creditors include Gap coverage in finance deals. If unsure, contact your insurance company or creditor to confirm. Some policies list it under insurance coverage add-ons.

Will gap insurance pay off my loan?

Yes, but only the remaining loan balance after your vehicle insurance pays the actual cash value (ACV). However, GAP insurance won’t cover missed payments, extended warranties, or extra fees added to your loan. It only covers the negative equity.

How is gap insurance payout calculated?

The payout equals your remaining loan balance minus the ACV paid by your auto insurance. For example, if you owe $25,000 and insurance pays $20,000, your gap coverage covers the $5,000 difference so you don’t have to pay out of pocket.

Is it bad not to have gap insurance?

It depends on your situation. If you owe more on your loan than your vehicle is worth, not having GAP insurance can be risky. If there’s an accident or theft, you would have to pay the difference. However, if you owe less than your vehicle's actual cash value, you don’t need GAP insurance.

Is gap insurance expensive?

Not really. Buying from an insurance company costs about $20 to $40 per year. However, dealerships charge $400 to $700 upfront as a one-time payment. The cost depends on your zip code, loan balance, and vehicle value.