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What Is Gap Insurance? How Does Gap Insurance Work?

Gap insurance is optional coverage that can help pay off your auto loan if your vehicle is totaled or stolen.

gap auto insurance coverage

Gap insurance covers the cost difference between what you owe on a financed or leased car and what your insurance company will pay out if it’s totaled or stolen. “Gap” stands for “guaranteed asset protection.”

A new car depreciates in value the second you drive it off the lot. If you total it or if someone steals it while you still owe money on it, your insurer will only reimburse you for its market value. And that amount could be a lot less than what you owe.

In other words, if you buy gap insurance, you won’t have to keep paying for a car you can’t drive if something happens to it before you’ve settled the loan or finished the lease.

This article covers these and other gap insurance topics:

How does gap insurance work?

Gap insurance pays out if your car is totaled or stolen and you owe more than its depreciated value.

For example, say you buy a new Toyota and owe $20,000 on it when you leave the dealership. Then you get into an accident. Your insurance company declares it totaled. It reimburses you $15,000 for the actual cash value of your vehicle, but you still owe $5,000 on it because the vehicle depreciated as soon as you drove it off the lot.

If you have gap insurance, you won’t have to pay that $5,000. Gap insurance covers the difference between the amount you still owe and the amount of your insurer’s reimbursement.

What if someone steals your vehicle? If you have gap insurance, it can pay out if the vehicle isn’t recovered.

If the police find your car and any damage done to it is repairable, your gap coverage won’t apply. The same is true if your insurance company finds you negligent — because you left the keys in the ignition, for instance.

Finally, you need other car insurance to buy gap coverage. You may even need both collision and comprehensive coverage before you can buy gap insurance. Carefully review your policy’s declarations page to see if this is the case before purchasing it.

What does gap insurance cover?

Gap insurance covers the “gap” between what you owe on a vehicle and what it’s currently worth. It only covers this gap, though, if your vehicle is totaled or if your vehicle is stolen and not recovered.

You don’t have to total your car in an accident to benefit from gap insurance. Your gap coverage should kick in if any of these events or disasters total it, too:

  • Fire
  • Flood
  • Hurricane
  • Tornado

As for what gap insurance doesn’t cover, or often doesn’t cover, here are a few examples:

How much is gap insurance?

Gap insurance could cost you just $20 a year, depending on where you buy it.

You may pay more if you get gap insurance from a dealership. Most dealers sell gap coverage for $500 to $1,000 per year. Many require a large upfront payment, too.

But if you buy gap coverage from an insurance company, it might add only a few dollars to your monthly or biannual payment.

To find the lowest rates on gap insurance, shop around and compare quotes from several companies.

Is gap insurance worth it?

Gap insurance may be a good idea if you owe more than your car is worth  — as is almost always the case with new cars.

A few other reasons gap insurance could be worth it for you, according to the Insurance Information Institute:

  • Your vehicle down payment is less than 20%.
  • Your auto loan is for five years or more.
  • You buy a car that depreciates faster than most others.

Gap insurance is a cheap way to make sure you’re covered if a car you owe money on is totaled or stolen. If you’re still paying off your car, give some serious thought to this inexpensive coverage option.

Where to buy gap insurance

Most major car insurance companies, like Allstate and Progressive, offer gap coverage. They usually sell it as additional coverage you can add to a standard auto insurance policy.

Here are some popular companies and whether or not they sell gap insurance:

Company Offers gap insurance?
Allstate Yes
GEICO No
Progressive Yes
USAA Yes

Something to keep in mind as you shop for this coverage: not all companies call it gap insurance. USAA, for instance, calls its offering “Total Loss Protection.”

Also, some companies sell products that are similar to gap insurance but differ from it in various ways. Take State Farm’s “Payoff Protector.” Although it acts like gap coverage, it isn’t an insurance policy. Instead, it’s a loan agreement that cancels a customer’s remaining unpaid principal balance in the event of a total loss.

Gap insurance from dealers

You can buy gap insurance from car dealerships, too, although you may not want to do so.

Gap insurance is typically inexpensive if you get it from an insurance company. It often costs quite a lot more if you get it from a dealer. Why does gap insurance from a dealer tend to be so expensive? Because dealers charge extra for shopping around for you. Do it yourself and you could save some money.

Can you buy gap insurance at any time?

You might be able to get gap insurance after you buy a car. Don’t expect it, though. Many insurance companies won’t sell you gap coverage if your car is more than two to six years old.

If you want to buy gap insurance for a used car, shop around. The more insurers you ask, the more likely you are to find one that’ll sell you gap coverage for an older vehicle.

How do I know if I have gap insurance?

Contact your car insurance company if you aren’t sure if you have gap coverage. Check your loan or lease documents, too. They should tell you if you have gap insurance.

You may have bought gap insurance from your dealer when you got your car, so be sure you’re not already paying for it before you buy this coverage elsewhere.

If you have gap insurance but don’t need or want it anymore, you may be able to cancel your coverage. Again, though, review your lease or loan terms to find out if and when you can do this.

How to get gap insurance

You can get gap insurance from many car dealerships, lenders and insurance companies.

Do you already have a policy with a car insurance company? If so, start there. Gap insurance bought from an insurer usually costs less than it does if you buy it elsewhere.

Should I get gap insurance?

You should at least consider buying gap insurance if you’re planning to buy a new car, get a high-interest loan, get a long-term loan or make a small down payment.

Here’s why you should think about getting gap insurance in each of these situations.

Buying a new car

According to Edmunds, a new car loses 11% of its value as soon as it leaves the lot. After five years, your car will be worth around 37% of its initial value. This is where gap insurance is most important and helpful: when the value of a car is less than the amount owed.

High-interest loans

If you buy a car for $10,000 on a 48-month loan with an 8% interest rate, you pay about $11,700 for it in total. The car will quickly depreciate, too, and that puts you at financial risk if something happens to it. This is another case where gap insurance can save you a lot of money if a thief steals it or if you total it in an accident.

Long-term loans

If you buy a vehicle with a loan term of 60 months or more, consider buying gap insurance, too. Spreading out your loan payments over a long period of time makes it difficult to catch up with the vehicle’s depreciating value.

Making little or no down payment

Skimping on a down payment means you’ll pay the bulk of the car's costs in the future. If you can't afford a good down payment, think about adding gap coverage to your auto insurance policy.

Is gap insurance required?

You might need to buy gap insurance if you finance a car, and you’ll likely need to buy it if you lease a car. Most leasing companies require gap coverage. Many even include it in the contract.

You may not need to worry about comparing quotes from multiple companies and comparing quotes when insuring a leased car, however. This is because it’s sometimes wrapped into your lease payment. Review your contract and make sure you don’t already have gap insurance coverage before you agree to pay extra for it.

Gap insurance in your state

Most state laws do not require drivers and car owners to buy gap insurance. State laws do sometimes impact whether a lender or lessor requires gap insurance, though.

In Texas, for example, it’s illegal for lenders or leasing companies to require gap waivers. And in Florida, gap insurance is optional, but lenders can require you to purchase it.

How do gap insurance refunds work?

You can cancel your gap insurance if you’ve paid off a good portion of your car loan and no longer need the coverage. If you prepaid for gap coverage, the insurer should refund the premiums you haven’t used.

Be aware that you may need to jump through some hoops when canceling insurance during a policy term.

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