What Is Gap Insurance for Cars? Do You Need It?

Janet Berry-Johnson
Written by
Janet Berry-Johnson
Janet Berry-Johnson
Written by
Janet Berry-Johnson
Janet Berry-Johnson, CPA is a freelance writer with a background in accounting and income tax planning and preparation. She's passionate about making complicated financial topics accessible to readers. She lives in Omaha, Nebraska with her husband and son and their rescue dog, Dexter. Visit her website at www.jberryjohnson.com.
Katie Powers
Edited by
Katie Powers
Photo of an Insurify author
Edited by
Katie Powers
Insurance Writer
Katie Powers is an insurance writer at Insurify with a producer’s license for property and casualty insurance in Massachusetts and expertise in personal finance and auto insurance topics. She strives to help consumers make better financial decisions. Prior to joining Insurify, she completed her undergraduate and graduate degrees at Emerson College. Her work has been published in St. Louis Magazine, the Boston Globe, and elsewhere. Connect with Katie on LinkedIn.

Updated December 2, 2022

Reading time: 7 minutes

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Gap insurance, or guaranteed asset protection, for cars is an optional auto insurance coverage that pays off your car loan if an accident totals your car or someone steals it and you owe more on your auto loan than the car’s value.

The insurance type covers the gap between the amount you owe and what your insurance will cover — usually the car’s current or depreciated value. Though you don’t always need to purchase gap insurance, you need it if you finance your vehicle and you’d be on the hook for paying off a loan on a car you can no longer drive.

Adding gap insurance to your auto insurance policy will increase the premium. So if you need this coverage, you should shop around to compare rates.

What is gap insurance and how does gap insurance work?

A gap insurance policy covers some costs if you experience a total vehicle loss and your car depreciates in value faster than you paid down your loan balance.

Most car insurance policies cover the vehicle’s market value just before the loss, which sometimes doesn’t provide enough to pay off the outstanding auto loan. As an optional coverage, gap insurance helps make up the difference between your car’s current value and any outstanding loan or lease balance.

What does gap insurance cover?

Gap insurance covers total vehicle losses, such as an accident that totals your car or someone stealing your car. When you file a claim, a standard insurance policy will cover the car’s actual cash value after any deductible.

If there’s a difference between what your insurance provider pays and what you owe on your car loan, gap insurance will cover it. However, gap insurance doesn’t cover additional charges, such as excessive lease miles or finance charges on a loan. Gap insurance also doesn’t cover property, personal injuries, or any issues with the car unrelated to an accident or theft.

How long does gap insurance last?

Gap insurance lasts for the entirety of your policy. But you can cancel it once your loan balance is less than the car’s value. Most people need gap insurance for the first couple of years they own or lease a vehicle but then have the coverage removed from their policy to lower their premiums.

How much does gap insurance cost?

The costs of gap insurance vary based on your risk factors. For example, insurance companies consider the following factors:

  • Your driving history, including its length and riskiness

  • Type of vehicle you drive

  • Age of the vehicle you drive

The cost of gap insurance also depends on where you purchase it. Rates typically vary by lender, according to the Consumer Financial Protection Bureau.[1]

Check Out: Gap Insurance for Used Cars (2022)

Does state law require gap insurance?

State law doesn’t require gap insurance, but some lenders or car dealerships may require it when you lease a car. Some new car dealerships automatically add gap insurance to your package, but you can decline the coverage to reduce your costs.

When you may need to buy gap insurance

Even though gap insurance is optional and not every eligible person needs to purchase it, you may decide you want the additional coverage. Certain situations that warrant considering gap insurance include the examples below.

If you have a car loan

Lenders may require that you have gap insurance if you take out a long-term car loan of five years or longer, according to the Insurance Information Institute. When you have a longer-term loan, you pay more interest up front, which means you have a higher risk of owing more than the car’s value. In addition, gap insurance ensures that you’ll be able to pay back your loan if you find your vehicle totaled or stolen.

If you lease your car

Leasing companies typically require gap insurance to protect their investment in the car. The company leasing your vehicle often builds gap insurance into the leasing agreement or as part of the contract. Monthly payments for a leased vehicle tend to be lower than typical auto loan payments, which increases the gap between the vehicle’s actual value and the amount you still owe. Gap insurance protects you, and the company you leased your car from, in the event of total loss. 

If you have a high-value vehicle that depreciates quickly

Luxury vehicles depreciate faster than regular vehicles, which may lead you to be upside-down on your loan almost as soon as you drive it off the lot. Unless you make a sizable down payment on the car, your lender might require gap coverage to protect the loan collateral.

If you drive a lot

If you drive more than average — more than 14,000 miles per year — your car will depreciate faster than average. This can leave you upside-down much faster and longer, making gap insurance worth it.[2]

When you don’t need to buy gap insurance

You don’t need gap insurance if you own your vehicle outright. Since you don’t have a car loan to pay off, there’s no gap for the car insurance policy to cover.

Read More: The 10 Best & Worst Car Insurance Comparison Sites for 2022

Where to buy gap insurance

Drivers can purchase gap insurance from almost any auto insurance company, car dealer, or lender. However, purchasing gap coverage from your auto insurer is typically more cost-effective than buying it from a car dealership.

Most car insurance companies offer gap insurance, but here are five known for providing the best quality gap insurance:

Travelers

Travelers offers loan/lease gap coverage for original owners of a financed or leased vehicle who purchased the car from a new car dealer.

Nationwide

Nationwide allows customers to purchase gap coverage as an add-on to a new or existing full-coverage policy.

Progressive

Progressive offers loan/lease payoff coverage, which is similar to gap coverage. However, the company limits payouts to 25% of the vehicle’s value in most states, so calculate your car’s gap coverage needs first.

Allstate

Allstate presents another good option for gap coverage, but you can’t add it to a vehicle you already own. Allstate only offers gap insurance when added to a finance agreement when you purchase a vehicle.

The Hartford

The Hartford can be a good option if you buy gap insurance within the first 30 days of buying the car. It offers affordable coverage and even further discounts for AARP members.

See Also: Cheap Car Insurance for 2022

Gap insurance alternatives

A few alternatives to gap coverage exist and may make more sense depending on your insurance needs. Learn more about these alternatives below.

  • New car replacement coverage gives you money for a brand-new car of the same make and model, minus your deductible. However, only cars of a certain age or mileage qualify.

  • Better car replacement coverage gives you enough money to purchase a car that’s one year newer and has at least 15,000 fewer miles than your current vehicle.

  • Loan/lease payoff coverage typically pays up to 25% beyond your vehicle’s actual cash value (ACV) if your car is stolen or totaled in an accident. The vehicle must be considered a total loss.

How to save money on car insurance

Car insurance is necessary, but that doesn’t mean you have to overspend to get it. Here are some ways to save money on car insurance.[3]

  • Compare car insurance quotes. Get multiple quotes online and compare your options. Look at the premiums, deductibles, and overall coverage.

  • Increase your deductible. The more responsibility you take for the cost of an accident or stolen vehicle, the lower your premiums will be. Don’t take on a deductible you can’t afford, but the higher your deductible, the less you’ll pay.

  • Practice safe driving. Insurance premiums often stem from assessed risk levels. Drivers with a clean record pay less than drivers with a history of tickets and accidents.

  • Look for discounts. Every insurance company offers different discounts that provide ways to save on insurance. See what discounts you qualify for, such as bundling your car and homeowners insurance, taking a defensive driver course, or paying your annual or six-month premium in full.

  • Drive an affordable vehicle. Some cars are more expensive to insure because they cost more to repair or have higher rates of accidents or being stolen. Do your research, and drive a car that insurance companies don’t consider high-risk.

  • Adjust your coverage levels. Don’t simply take car insurance at face value. Instead, decide what types and levels of coverage you need. For example, if you drive an older car, you may choose not to carry comprehensive and collision coverage.

Read More: Free Car Insurance Quotes

Gap insurance for cars FAQs

  • Gap insurance bridges the gap between your outstanding loan or lease balance and your car’s current value. It only covers you if your car is totaled or stolen, helping you pay off your car loan or lease when you no longer have a car.

    Gap coverage typically only adds about $20 per year to your annual premium when purchased as an add-on to your existing policy, according to the Insurance Information Institute.

  • Full-coverage insurance doesn’t include gap insurance. If your car is totaled in an accident or stolen, full-coverage insurance only pays the actual cash value of your car. If you owe more than the car’s current value, you’d be on the hook to pay off the loan balance. Gap insurance closes that gap to help you pay off your car loan.

  • Some insurance companies allow you to purchase gap insurance after you buy a car, but you may have a limited window of time to do so. Therefore, it’s best to decide if you need gap insurance when you buy the car or shortly afterward.

  • Gap insurance can be worth it if you buy a car that depreciates quickly, make a small down payment, or lease a car. If paying off a loan on a car you can no longer drive would make your life difficult, the cost of gap insurance might provide peace of mind.

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Sources

  1. Consumer Financial Protection Bureau. "What is Guaranteed Auto Protection (GAP) insurance?." Accessed December 2, 2022
  2. Kelley Blue Book. "Average Miles Driven Per Year: Why It Is Important." Accessed December 2, 2022
  3. Insurance Information Institute (III). "How to save money on car insurance." Accessed December 2, 2022
Janet Berry-Johnson
Written by
Janet Berry-Johnson
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Janet Berry-Johnson, CPA is a freelance writer with a background in accounting and income tax planning and preparation. She's passionate about making complicated financial topics accessible to readers. She lives in Omaha, Nebraska with her husband and son and their rescue dog, Dexter. Visit her website at www.jberryjohnson.com.

Learn More
Katie Powers
Edited by
Katie Powers
Linkedin

Insurance Writer

Photo of an Insurify author
Edited by
Katie Powers
Insurance Writer
Katie Powers is an insurance writer at Insurify with a producer’s license for property and casualty insurance in Massachusetts and expertise in personal finance and auto insurance topics. She strives to help consumers make better financial decisions. Prior to joining Insurify, she completed her undergraduate and graduate degrees at Emerson College. Her work has been published in St. Louis Magazine, the Boston Globe, and elsewhere. Connect with Katie on LinkedIn.