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Gap Insurance (Guide)

Gap insurance is optional car insurance coverage that helps pay your auto loan or lease off if your vehicle is stolen or totaled and you owe more than it's worth.

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09/11/2023 05:02 PM

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Guaranteed asset protection insurance, also known as gap insurance, helps protect your wallet if your car is stolen or totaled. In this guide, we’ll explain what gap insurance is and how it works. We’ll also recommend two of the best car insurance companies that offer gap coverage.

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What Is Gap Insurance?

Gap insurance, also referred to as loan/lease payoff insurance, is optional coverage that helps pay the remaining balance of your auto loan or lease in the event of theft or a total loss. If your financed or leased car is totaled in an accident or stolen, gap insurance covers the difference between the car’s depreciated value and what you owe on your auto loan.

Owing more money on your car loan than your car’s actual cash value is called having “negative equity.” You’ll sometimes see it referred to as being “upside down” on your loan.

How Does Gap Insurance Work?

Gap insurance works in tandem with collision coverage and comprehensive coverage. If your car is totaled in a situation covered by either policy, the maximum payout from your insurer is the actual cash value (ACV) of the vehicle before the damaging incident.

Here’s what happens when you file a gap insurance claim:

  1. Your car is totaled in an accident or stolen. Depending on the situation, you file a claim under your collision insurance or comprehensive insurance.
  2. Your insurer pays out your vehicle’s ACV minus your deductible. If the value of your car is $12,000 and you have a $500 deductible, the insurance company pays you $11,500.
  3. You owe $15,000 on your car, but since it’s worth $12,000, you’re upside down on your loan. The insurer paid out $11,500, which means you still need to pay an additional $3,000 to cover the loan amount.
  4. Gap insurance covers the $3,000 you owe the lender.

If you don’t have gap coverage, you’ll be responsible for paying that $3,000 out of pocket, in addition to your $500 insurance deductible.

Here’s how insurance claims would look for a vehicle with an ACV of $12,000:

With Gap InsuranceWithout Gap Insurance
Amount owed on auto loan$15,000$15,000
Amount covered by collision or comprehensive policy$11,500$11,500
Insurance deductible$500$500
Amount covered by gap insurance$3,000$0
Additional out-of-pocket expense$0$3,000

Should I Carry Gap Coverage?

You can only get gap insurance if your vehicle is financed or leased. Even if it is, whether you should purchase a gap insurance policy depends on how quickly your car depreciates.

According to the Insurance Information Institute, new cars depreciate the moment you leave the dealership, but some cars depreciate faster than others. It’s common for cars to depreciate by 20 percent in the first year. Unless you make a large down payment, your loan balance can quickly eclipse the value of your vehicle.

Is Gap Insurance Worth It?

Gap insurance could be worth it for you in the following scenarios:

  • You purchased a car that depreciates quickly.
  • You’re financing the vehicle.
  • Your loan term is 60 months or longer.
  • You’re leasing the vehicle.
  • You made a down payment of 20 percent or less.
  • You drive frequently.

To determine if gap coverage is financially worth it, follow these steps:

  1. Use the Kelley Blue Book online tool to estimate your car’s value. You can also use car depreciation calculators to calculate how much the value of your car will decrease each year until you pay your loan off.
  2. Compare how much you will owe on your car loan to what your car is worth for each year of ownership.
  3. Calculate your gap insurance premium for each of those years.
  4. Compare all of these numbers. The difference between what your car is worth and what you owe in loan payments is the amount gap insurance will cover. If that number is more than what you would pay in gap insurance premiums, the coverage might be worth purchasing.

How Much Does Gap Insurance Cost?

Gap insurance coverage is typically inexpensive, generally adding $20 to $40 per year to your premium when purchased from an auto insurance company. You can also buy gap insurance from some dealerships, but it will likely be more expensive.

Here are some factors that affect your gap insurance cost:

  • Vehicle’s actual cash value
  • Vehicle’s age
  • Location
  • Claims history

Where To Buy Gap Insurance

Most large insurers offer gap coverage, but you can check while shopping for car insurance. These companies only sell gap insurance as an add-on to existing car insurance policies. This means you’ll have to purchase the coverage from the provider you already have.

Your car dealership or lender may also sell gap insurance, but it will usually be more expensive than purchasing it through your insurer. Lenders and car dealers often lump the cost of gap insurance into loan payments when drivers buy coverage from them.

Does Gap Insurance Always Pay Out?

Gap insurance will pay out if your theft or total loss claim is approved and the amount you’ll receive is less than what you owe on your car loan. Gap insurance won’t pay if your car is damaged but not considered a total loss. Some gap insurance policies limit the total amount you can receive. If your car has depreciated significantly, a gap insurance payout may not cover the whole loan.

Gap Insurance: Conclusion

Gap insurance can give you peace of mind if you have a leased or financed new vehicle you still owe money on. If you’re involved in a car accident and your car is deemed a total loss, gap insurance can help pay the difference between what you owe on the loan and what your car is worth.

It’s usually a lot cheaper to buy gap coverage from an insurance provider than a car dealership. We conducted an industry-wide review of the top insurance providers to help simplify your search. No matter what coverage you’re looking to purchase, it’s good to compare car insurance rates from a few providers. We recommend contacting Travelers and Progressive for free car insurance quotes.

Travelers: Best Coverage Options

Travelers is one of the oldest insurance companies in the world, and its extensive coverage options and discount opportunities make it a popular choice among drivers. Along with its six standard insurance coverage options, Travelers offers these:

  • Gap insurance
  • Rental car coverage
  • New car replacement coverage
  • Accident forgiveness

The insurer has an A++ financial strength rating from AM Best and an A rating from the Better Business Bureau. Travelers has one of the highest scores in our review of the best car insurance companies, earning 4.5 out of 5.0 stars.

Read more: Travelers review

Progressive: Best Usage-Based Insurance

Progressive has become one of the most popular insurance providers in the industry thanks to its easy quotes process and highly rated mobile app. While the provider doesn’t have the cheapest car insurance coverage on the market, it does offer a usage-based insurance program that’s a good option for high-risk drivers.

In addition to gap coverage–which Progressive calls loan/lease payoff insurance–the insurer offers the six standard coverages and several add-on options. Progressive also holds an A+ financial strength rating from AM Best. We rate Progressive 4.3 out of 5.0 stars for its wide variety of coverage options and its accessibility for risky drivers.

Read more: Progressive review

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Gap Insurance: FAQ

What is the purpose of gap insurance?

Gap insurance is optional coverage that helps pay off your loan or lease if your vehicle is stolen or considered a total loss. It pays the difference between what you owe and what your car is worth, minus your deductible.

What is the most gap insurance will pay?

Gap insurance generally pays the difference between the actual cash value (ACV) of your vehicle and the amount you owe on your car loan, minus your deductible. However, some gap insurance policies limit the amount you can receive.

How long do you pay gap insurance?

Most gap insurance policies last three years at the most.

Our review process aims to deliver consistent and unbiased assessments of car insurance providers. While there are multiple qualities that make a car insurance company successful, our review team focuses on those we believe are the most important for consumers:

  • Cost: Cost can be difficult to compare between insurers because so many factors impact annual premiums. The cheapest insurer for one driver may not be the cheapest for another. To determine our cost score, we look at insurance rate estimates generated by Quadrant Information Services, discount opportunities, and consumer reports.
  • Coverage: To determine our coverage score, we look at the number of coverage options available as well as coverage limits and deductible options. Our ratings also take into account additional services and benefits like roadside assistance.
  • Reliability: It’s important that an auto insurer is able to meet its claims obligations. Companies with a strong financial strength rating from AM Best score best in this category. Established insurers with a long history of reliable service also receive positive marks.
  • Service: We comb through customer reviews on sites like the Better Business Bureau (BBB) to learn about customer experiences. Insurers with a low volume of complaints score well in this area. We also consider the claims process, giving higher ratings to car insurance providers that offer easy-to-use claims apps.

*Data accurate at time of publication.