What is gap insurance, and how does it work?
Gap insurance — also known as guaranteed auto protection insurance — is a type of insurance coverage that helps protect car owners from financial loss in the event of a total-loss accident or theft. It covers the “gap” between the vehicle’s actual cash value (ACV) and the amount you still owe on the car loan or lease.[1]
When you purchase a new car or truck, its value instantly begins to depreciate. Most vehicles experience a significant drop in value — often around 20% — within the first year. If you have a standard auto insurance policy, it typically covers the depreciated value of the vehicle. In other words, if your insurer declares your car a total loss, it will reimburse you for the current market value of the vehicle as of the time you file a claim.
However, if you leased or financed the purchase of your new car with a down payment of less than 20%, there’s a possibility that the amount left on the loan or lease will be more than the market value of the vehicle in the initial years of ownership. This creates a gap between what your insurance company pays after a total loss and what you still owe on the loan or lease.
What does gap insurance cover in Massachusetts?
Gap insurance covers the difference between the ACV that your insurance policy pays and the remaining amount you owe on the loan or lease. In the event of a total loss accident or theft, the gap insurance company pays off the remaining balance on your loan or lease, ensuring you don’t have to bear the financial burden.
For example, let’s say you purchased a car for $30,000 and took out a loan to finance it. A year later, the car is in an accident and your insurer declares it a total loss, reimbursing you for its actual cash value of $24,000. However, you still owe $28,000 on your car loan. In this scenario, your standard auto insurance will only pay you $24,000 based on the car’s ACV, leaving you with a $4,000 gap. With gap insurance, the insurance company covers this $4,000 gap, allowing you to pay off the loan completely.
Good to Know
It’s important to note that gap insurance typically has certain limitations and restrictions. It may have a maximum coverage limit, and it usually doesn’t cover other expenses such as deductibles, late-payment fees, or extended warranties. Additionally, it's usually only available for new and leased cars, not used vehicles.[1]
Gap insurance vs. full coverage
In Massachusetts, full-coverage insurance generally refers to a combination of different types of auto insurance coverage that provide a higher level of protection than the state’s minimum required coverage.
In Massachusetts, the minimum required auto insurance coverage includes:[2]
$20,000 per person for bodily injury liability
$40,000 per accident for bodily injury liability
$5,000 per accident for property damage liability
$8,000 per accident for personal injury protection (PIP)
$20,000 per person and $40,000 per accident for uninsured motorist coverage
Full-coverage insurance includes these mandated coverages, plus comprehensive and collision insurance coverages. Comprehensive insurance pays for damages to your car not related to collisions like theft, vandalism, and weather damages. Collision insurance pays for your car repairs from collision-related damages, like hitting a pole or another vehicle. However, neither of these coverages pay for the difference between your auto loan and lease and your car’s actual cash value after a total loss, but that’s where gap insurance comes in.
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Liberty Mutual
USAA
Midvale Home & Auto
Allstate)
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