What’s Gap Insurance? A Comprehensive Guide

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A totaled lease or loan doesn’t have to be a total nightmare.

Gap insurance (or GAP, for Guaranteed Asset Protection/Guaranteed Auto Protection) is a kind of additional coverage that might be required of drivers that lease or loan their vehicles. The word “gap” also refers to the price difference (negative equity) between what your vehicle is worth (the actual cash value of your car) and how much you still owe on a loan or lease. It’s kind of a toofer in that way.

Gap insurance is also different from regular car insurance coverage in that not everyone needs a gap policy. Gap insurance is an optional add-on that some drivers might need in the event that their leased, loaned, luxury, or long-distance vehicle (the four Ls!) gets in a devastating wreck. It’s an additional layer of auto insurance coverage that can be tacked on to your typical auto insurance policy.

In less than two minutes, Insurify can offer you real-time car insurance quotes tailor-fit to your personal needs and risk profile. You can unlock savings opportunities (like good driver, military, and low mileage discounts) and compare low auto policy rates from the nation’s top-ranked regional and national car insurance companies.

Is gap insurance for me?

If you’re on the lookout for an auto insurance policy that will cover your leased, loaned, or luxury vehicle, gap insurance might be for you.

If you own your car, owe less than your car is worth, or don’t fall into any of the below categories, congrats! You don’t need gap insurance coverage. (Attention, car owners: you still might want to check out Insurify to unlock the best deals for your car insurance premium. When’s the last time you did some quick auto insurance comparison shopping?)

You may qualify for and need gap insurance if:

  • You lease or loan a vehicle that requires itYour lender might require gap coverage as part of your finance agreement, in addition to comprehensive and collision.
  • You paid a lower down payment on your car loan (also known as an underwater or upside down auto loan). Your loan amount matters here. Typically, it’s in your interest to buy gap insurance if your down payment was less than 20 percent of the vehicle’s full price.
  • You opted for a longer lease. Did you lease your car and finance it for 60 months or longer? If so, you’re putting your car at risk, considering such a long finance plan covers a lot of time that the vehicle will spend depreciating.
  • You tend to drive long distances. 
  • You drive a luxury or otherwise high-value car. These vehicles tend to depreciate faster than average.
  • You rolled over negative equity into a new car loan. 

How does gap insurance work?

A new car becomes “used” as soon as it leaves the car dealership. As such, the vehicle’s value depreciates the second it hits the pavement after a transaction. In fact, most insurance thought leaders say that the typical car will lose 20 percent of its value within the first year after purchase, loan, or lease. (Keep in mind that appraisers often use Kelley Blue Book to determine the actual value of a new vehicle. Your car’s value will likely be determined by this industry standard.)

Gap insurance covers the remaining loan balance or lease amount remaining in your finance agreement. That’s why it’s best served for those who are “underwater” on their loan. In other words, you are x amount of dollars underwater when your leased or loaned car is totaled, with an actual cash value of y, but with an outstanding loan balance of z, where z – y = x.


Keep in mind that insurance will not cover comprehensive or collision coverage costs – you will still have to pay your deductible in the event of an accident that’s covered by your gap insurance policy.

What will—and won’t—my gap insurance cover?

With a gap coverage policy, your insurance company pays damages for the following scenarios:

  • Your car is stolen. stolen car is no joke. Luckily, theft is one of the conditions under which your car is covered in a gap insurance policy.
  • The event of a total loss. No one likes a totaled car, either. Gap insurance will cover your loaned or leased vehicle in the event that it’s been irrevocably and totally damaged.

A gap coverage policy will not cover you in the following scenarios:

  • You get in an accident, but your car isn’t totaled. You’ll have to rely on your normal car insurance policy in the event you get in an accident and your vehicle sustains damage. Gap insurance will only cover a car that is beyond repair, or damages that are inordinately expensive to repair.
  • You or someone involved in the accident sustains a bodily injury or dies. Gap insurance does not cover bodily injuries, medical expenses, funeral costs, or lost wages as a result of an accident. It only applies to vehicle losses.
  • Your engine fails. Gap insurance only covers totaled vehicles, not cars that have died as a result of engine breakdown.

Additionally, the comprehensive or collision insurance deductible is still your responsibility to pay in the event of an accident, even if you have gap insurance.

How do I get gap insurance?

There are typically two ways of going about getting gap coverage.

  1. You buy it from an insurance broker. Because you’ll be purchasing coverage from a licensed professional, this method is regulated by the insurance industry. Many auto insurance companies offer gap coverage (see below).
  2. You buy it through a waiver agreement sold by a finance company or a finance & insurance manager. This method is unregulated…buyer beware!

Either way, you’ll likely get the opportunity to purchase gap insurance as a soft product at the car dealership. Coverage is typically financed as part of the loan or lease agreement.

Which car insurance companies offer gap insurance?

The following insurance companies currently offer gap insurance:

State Farm offers similar coverage to gap insurance, called Payoff Protector®.

Click on the company names above to learn about what other products and discounts these insurers offer.

So, how much will gap insurance cost me?

Is gap insurance really worth it? That’s all up to you, but you’ll be happy to know that it won’t necessarily break the bank.

The Insurance Information Institute contends that including gap insurance with your comprehensive and collision coverage will only add around $20 a year to your annual premium if you buy through an auto insurance company.

If you choose to buy gap insurance through a lender, you may be charged a flat fee that’s anywhere from $500 to $700, according to United Policyholders. Standalone gap insurance that you buy online could cost a one-time fee of around $200 to $300.

How long do I need gap coverage for?

You should be good to cancel your gap coverage if and when:

  1. You’ve paid off your loan. No gap? No gap insurance necessary.
  2. Your car is no longer new. After one to two years, the amount you owe on your vehicle should be less than the vehicle’s worth. Once your car’s value (according to Kelley Blue Book) is close to the loan balance, you should be safe to cancel your gap insurance.
  3. Since gap insurance from dealers is usually paid for up front, you’ll qualify for a refund if you sell or refinance your vehicle.
  4. You paid too much because you bought it from a dealer. Your policy documents should tell you how you can cancel your gap insurance – typically within 30 days of the transaction. Act quickly if you think you overpaid!
  5. You need to cut back on car insurance costs. You might save a small amount on your car insurance premium if you remove gap insurance from your policy. But savings are almost guaranteed when you shop for and compare auto insurance quotes with Insurify to find the best (and maybe even discounted!) quotes from top-ranked regional and national carriers.  

Is gap insurance worth it? 

Customers speak out on the utility and ease of gap insurance:
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Refund GAP insurance from r/personalfinance


The bottom line: If you need gap insurance, buy it through an insurance company. Consider switching to a company that offers gap coverage in order to save on your gap insurance payment and bundle it in directly to your auto policy.

Mind the gap!

Nick Dehn is a writer currently serving as a content specialist for Insurify. A seasoned writer, Nick has produced feature pieces, opinion editorials, and press releases for start-ups, small businesses, and local news publications. He now develops content full-time for Insurify, researching and writing data-driven studies and producing insights on the insurance industry. Nick is an alumnus of Williams College, where he graduated cum laude with a degree in English and Sociology. He hails from Wilton, CT but has recently set roots in Cambridge, MA. Nick enjoys exploring the greater Boston area, making stir-fry, and award-show prognosticating.