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What Is GAP Auto Insurance and Is It worth the Money?

If you’re planning to buy or lease a new vehicle, it may be smart to spend a few extra dollars to add Gap coverage to your car insurance policy.

gap auto insurance coverage

The last thing most of us want to think about when buying or leasing a brand-new car is what would happen if it were to be “totaled”.

Ignoring that possibility can prove costly, however. Imagine having your new car totaled or stolen while you still owe money on it. Gap insurance covers this exact scenario. We'll discuss what gap insurance is, how it works, and whether or not you need it.

What is Gap Insurance Coverage and How Does It Work?

Gap insurance—with “gap” standing for “guaranteed auto protection”—protects you from situations like the following:

Imagine going and buying a new car for $28,000. You pony up a five percent down payment on the day of purchase, so you drive off the lot owing about $26,500 on your shiny new set of wheels. A year later, you get into an accident that “totals” your still-pretty-new vehicle. The insurance company cuts you a check for your cars current market value; $17,500. However, you still owe the lender nearly $20,000 for the car.

Without gap insurance, you would be responsible for coming up with the $2,500 or so that wasn’t covered by the collision or comprehensive portions of your auto insurance policy.

In other words, gap policies cover the difference between what you owe on a car and what would be covered by your insurance company should it get totaled in an accident.

When Do I Need Gap Insurance?

If any of the following scenarios apply to you, consider purchasing gap insurance:

  • Buying a brand new car: When you purchase a new vehicle, it depreciates in value the instant you get the keys. According to Edmunds, a brand new car loses 11 percent of its value once it leaves the lot. And after five years, your car will be worth an estimated 37 percent of its initial value.

    Most people don't outright buy a new car with cash. They finance it and pay it off over time. That's where gap insurance is most important: when the value of the car is less than the amount owed. And that's usually the case when buying a brand new vehicle.
  • High interest loans: Purchasing a vehicle with a high interest loan means the car costs more than it's worth in the long run. If you buy a car for $10,000 on a 48 month loan with an eight percent interest rate, you'll end up paying about $11,700 in total. The car will quickly depreciate, putting you in financial risk if the car is totaled. This is another scenario where gap insurance can save you a lot of money in the event of a bad accident.
  • Long term loans: If you purchase a vehicle with a loan term longer than 60 months, buy gap insurance. Spreading your loan payments out over a long period of time makes it difficult to catch up with the cars depreciating value. A lengthy loan virtually ensures you will have negative equity at some point.
  • Buying a collectors or niche car: Unique or modified cars are usually worth more than the value assigned by insurance companies. Gap insurance can help address the discrepancy.
  • Little or no down payment: Skimping on a down payment leaves the bulk of the car's costs to be paid in the future. If you can't afford a substantial down payment, consider gap insurance.
  • High mileage: If you commute more than 15,000 miles a year, your car will depreciate faster than average. Cars already quickly depreciate as is, consider buying gap insurance if you drive a lot.

How Do I Get Gap Insurance?

Gap insurance is available through many avenues. Most insurance companies offer gap policies. You can also purchase gap insurance from a car dealership, or through a lender.

First, check with your current car insurance provider and see what they offer. You may be entitled to policy bundle discounts.

Each gap insurance policy is different, and the prices can vary quite a bit. The smartest way to get the best gap insurance policy for the best price is by comparing gap insurance quotes.

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Be Cautious Buying Gap Insurance from Car Dealers

When you buy a car from a dealership, you will face many pitches for upsells. The sales people will try to sell you warranties, anti-theft devices, service packages, and more. Most car dealers will also push a gap insurance policy on you.

If you want to save money, be wary of buying gap insurance from your car dealer. Instead, get gap insurance quotes from insurance companies and credit unions first. You have much higher chances of getting a great deal if you compare quotes.

Do I Need Gap Insurance for Leased Cars?

It can be even more important to invest in gap insurance if you lease a car. The main reason for that: the gap between what is owed on a leased car and what that car is worth tends to be bigger than the same sort of gap for a car that has been purchased. (Also, a leased car’s gap often lasts the entire period of its lease.)

The good news here is that most leasing companies require gap coverage—or “loan/lease coverage,” as it’s sometimes called—and even include it in the contract. In other words, you may not have to worry about contacting insurance companies and comparing quotes and the like if you go the leasing route.

If that’s not the case and you have to buy it on your own, let QuoteWizard connect you with agents from a number of top insurance providers. Then you can compare rates on gap insurance coverage.

Do I Need Gap Insurance for Used Cars?

You may be wondering if gap insurance is a worthwhile expense if your car is a few years old. Or you’re wondering if it’s worth picking up if the car you want to buy is a used one. The short answer to both questions is “probably not,” although there are exceptions.

Used cars aren’t the best candidates for this coverage. Why not? The difference between what a person owes on the car and what it’s actually worth is at its greatest when the car’s still brand new. That gap gradually decreases over time—to the point that it usually ceases to exist within about three years.

So, if you want to buy a barely used car, or if your existing car is just a year or two old (and isn’t currently covered by this type of insurance), you could consider gap insurance. Beyond that, though, you probably should pass on it.

One fairly major and noteworthy exception: you buy a used vehicle for far more than its depreciated value and finance it without a down payment. In such a situation, what you owe on the car is more than it’s worth, so a potentially meaningful “gap” would exist for at least a brief period of time.

Gap Insurance FAQ

Q: Am I required to have gap insurance?

A: If you lease a car, it’s likely the contract you sign as part of that transaction will require it. The leasing company probably will include gap insurance in its agreement, too, as part of the lease terms.

Some financing companies also require people to buy this coverage for purchased cars, although that seems to be far from the norm.

Something to be aware of regardless: some lenders add this coverage to loans without making their customers aware of that fact. So, review your loan documents to make sure you don’t already have gap-insurance coverage before you decide to pay extra for it.

Q: How much does gap insurance cost?

A: It depends on where you get your gap insurance. If you buy it via a dealership, you’ll likely pay more than you will if you go through an insurance company. Most dealerships sell gap-insurance coverage for $500 to $1,000, and many require a large upfront payment. (And of course you’ll pay interest on the remaining amount.)

If you turn to an insurance company for this type of coverage, on the other hand, it’ll add a few extra dollars to your monthly or biannual payment. (Budgeting about $20 annually for this seems to be a safe bet.)

Q: How can I save money on gap insurance?

A: Shop around and compare quotes for gap auto insurance policies from several companies to find the lowest rates.

Q: Where can I find gap insurance providers?

A: Many car dealerships offer gap coverage at the time of purchase, and most auto insurance companies offer it as well, so you definitely should feel free to shop around.

Q: Are there any situations under which someone would want to avoid gap insurance?

A: Along with people who are looking to buy or insure a used car that’s more than three or so years old, here are a few other folks who may want to pass on gap insurance:

  • People who buy a new car outright by paying for it with cash
  • People who have enough cash reserves to cover both the gap in the insurance payoff and the value of their car
  • People who purchase a car with a large (25 percent, for example) down payment
  • People who finance their car for a fairly short period of time (such as, say, 24 months)

In the case of that last bullet point, by the way, a gap will exist between what is owed on the car and what it is worth. That said, it will be small and it will quickly dwindle to zero--possibly within six months of the purchase. Therefore, it’s risky to turn down gap coverage during that period.

Another group of people who probably should say “no” to gap insurance: those whose loan agreement includes a “pay-off benefit.” When such a benefit is in place, your lender covers any gap that exists between what you owe for your car and what it’s worth if it’s totaled during an accident.

Q: What if, after doing my research, I decide I don’t need or want gap coverage?

A: Simply say as much to the person at the dealership or to your lender.

Oh, and before you sign on the dotted line, ask for an itemized list of everything that’s included in your loan payment so you can be sure you’re not paying for gap insurance or anything else you didn’t OK.

Q: Should I continue to pay for gap insurance after I’ve owned my car for three or more years?

A: Probably not. Thankfully, you are free to remove your gap (or loan/lease) coverage from your policy as soon as you no longer owe less than your car is worth—or earlier than that, if you wish.

Some insurance companies let you know when you no longer need this kind of coverage, by the way, but of course it can’t hurt to keep on top of things yourself, too.

Q: What kinds of car buyers are particularly good candidates for gap insurance?

A: If your down payment is less than 20 percent of the total cost of the car you’re buying, you should pay for gap insurance. The same is true if you’re looking to finance your car for 60 months or longer. And then, as mentioned earlier, gap policies are a must if you’re planning to lease a car.

Q: Will gap insurance pay for damage to a car that is not totaled?

A: Unfortunately, no. Gap insurance only pays out if the vehicle is a declared a total loss.

Q: Would gap insurance cover my car if it’s stolen?

A: Only if it is stolen and never recovered. In that case, it would be considered a total loss and it would trigger your gap-insurance coverage. If the car is found, but is repairable, though, or if you’re found to be negligent (because you left the keys in the ignition, or something like that), your gap coverage won’t come into play.

Q: Does a gap policy cover my down payment, my deductible, or even my fuzzy dice?

A: No, all it covers is the difference between what you owe on your totaled car and what your insurance company pays you for the actual cash value of it.

Q: Do I continue making my car payments after my car is totaled if I have gap coverage?

A: In most cases, yes, you’ll have to continue making your car payments until you’ve paid the lender what you owe. Check with your insurance company to be sure, though, as requirements in this and other areas vary widely.

Q: Is there anything else related to gap insurance that I need to know about or keep in mind?

A: It’s possible your gap insurance won’t be honored if you don’t also have collision and comprehensive coverage as well, so carefully review your policy’s declarations to see if that is the case.

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