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Gap insurance covers the difference between what you owe on your car loan and what insurance pays if your car is totaled. You can purchase gap insurance from most major insurance providers and some car dealerships.

Gap insurance is an optional coverage that protects you when you're upside down on your car, which means you owe more than it's worth. It kicks in if the car is a total loss. If you're considering gap insurance for your financed or leased car, read on. 

  • Gap insurance covers the difference between what you owe on your auto loan and the actual cash value of your vehicle in the event of a total loss.
  • Gap insurance is only available from insurance companies on full coverage policies that include both comprehensive and collision.
  • You can also purchase standalone gap insurance, usually from the car dealer.

What is gap insurance?

Gap insurance is a type of car insurance that covers the difference between your auto loan balance and the car's cash value in the event of a total loss.

It's not uncommon for consumers to buy cars with little or no down payment, then drive off in a vehicle that's worth less than what they owe. Even with a down payment, depreciation happens fast, so being upside down is not unusual. If your car is totaled, your comprehensive or collision insurance reimbursement is based on the vehicle's actual cash value, not your loan balance. If the actual cash value is below the loan balance, you're responsible for the difference.

Or, if you have gap insurance, the insurance company is responsible for the difference.

Gap insurance stands for guaranteed asset protection according to some companies, and kicks in when your car is stolen and not recovered, or is totaled in an accident. You'll need to have full coverage on your policy to have gap insurance. 

How much does gap insurance cost?

The cost of gap insurance depends on a few factors, including the make and model of your vehicle, and where you buy the policy. According to an analysis by Insurance.com based on the most recent data, the average cost of gap insurance is $2,080 a year, which breaks down to about $173 per month. However, not all gap policies are alike. Some have extras, such as warranties that are rolled into your auto loan, which costs more.

Although it may be the most convenient option, purchasing gap insurance from your dealer is usually not the cheapest.

Attorney Steve Lehto of lehtoslaw.com says one issue is that the dealer gets a cut of the policy price.

"That is, the insurer simply says, 'As long as we get $300 for this, you can mark it up as much as you like.' So the policy could then be $399 ($99 profit) or $999 ($699 profit). These things are negotiable. Anyone who pays the asking price for gap at a dealer is a sucker. At the very least, call your own agent and get a competitive bid," Lehto says.

There can, however, be an advantage in buying gap insurance through a dealer.

tip iconTIP"Sometimes the dealer coverage will pay off a portion of the loan, which was rolled in from a previous loan," says Lehto. "Whereas, gap coverage from a typical insurer only covers the loan payoff attributable to the car's purchase price."

Gap insurance versus lease/loan and new car replacement insurance

In addition to gap insurance, there are other types of insurance products – lease/loan coverage and new car replacement insurance – that can protect you financially if your car is totaled.

What's the difference between gap and lease/loan coverage?

Both gap insurance and lease/loan insurance help to cover the difference between your vehicle's cash value and the amount you still owe on its loan or lease, in the event of a total loss. The main difference between the two insurance types is that lease/loan coverage generally stipulates a limit on what benefit is available, generally as a percentage of your vehicle's value.

According to insurance company Esurance, lease/loan insurance often pays about 25% of your vehicle's actual cash value. Depending upon where you are in your loan repayment process and how that compares to your vehicle's cash value, this may or may not be enough to cover your remaining loan or lease value in the event of a complete loss.

For example, if your car is worth $25,000 and your lease/loan coverage pays up to 25% of your vehicle's worth, the maximum payout in the event of a total loss would be $6,250. During the early part of your loan, this coverage amount may not provide complete protection.

What's the difference between gap and new car replacement insurance?

Gap insurance coverage is designed to protect you if your car is a total loss by making up the difference between the auto loan balance and the car's cash value.

New car replacement coverage is different. It covers the difference between the car's cash value and the cost of purchasing that exact car again new. When you drive a new car off the lot, it officially becomes a "used" car and loses value immediately. If you total your new car while colliding with a boulder on your way home from the dealership, the car's cash value would be less than the cost of replacing it. Replacement coverage would make up the difference, allowing you to buy another car exactly like the one you totaled.

However, this has nothing to do with your loan amount. If your loan balance exceeds the car's replacement value, you'll still have to pay your lender unless you have gap insurance. The illustration below shows what happens when you total your car with gap insurance.

gap insurance pays more than new car replacement coverage

If the cost to replace your car is higher than your loan balance, it may be best to have new car replacement coverage. The illustration below differs from the one above in that the replacement cost is higher than the loan balance.

new car replacement insurance pays more than gap coverage

The comparison between gap and new car replacement depends on the loan balance and the car's depreciation rate. If your loan amount exceeds the car's purchase price, gap insurance should pay more. If the loan is less than the car's replacement price, new car replacement may pay more.

How does gap insurance work?

Gap insuranceGap insurance applies when your car is declared a total loss that is covered by collision or comprehensive insurance.

This illustrates where gap fits into your insurance protections:

  1. Your insured car may have a cash value of $5,000
  2. Assume the amount owed on your auto loan is $6,000.
  3. An accident renders your car a complete loss.
  4. After your deductible, your comprehensive or collision insurance should cover the cash value of your vehicle, or $5,000.
  5. Your gap coverage would provide the $1,000 needed to pay off your auto loan.

Note: Gap insurance doesn't apply a deductible and some gap policies provide reimbursement of your comprehensive or collision deductible.

What does gap insurance cover?

Gap insurance covers any situation where the car is a total loss, it's covered by car insurance, and the claim settlement is less than the loan. If you lease and your car is totaled while it's still being leased then gap insurance will pay off what remains of that lease balance.

What isn't covered by gap insurance?

Gap insurance doesn't make up missed payments and late fees if you lose your job, if you need a rental car or if your car is repossessed.

A summary of items typically not covered by gap insurance include:

  • Items purchased with the auto loan, such as extended warranties or credit life insurance.
  • The unused balance of an extended warranty.
  • Any balances from prior loans.
  • Lease or loan security deposits.
  • Any equipment that you added to your car beyond what was factory-installed.
  • Past due loan or lease payments.
  • Lease penalties for excessive mileage.
  • Deductions made by your primary insurer for previous damage, towing, storage and/or wear and tear.
  • Any other losses that are excluded from your auto insurance policy.

In addition, it's important to note that gap insurance isn't retroactive. You can't buy it after an accident and file a claim for that accident.

tip iconTIP"As with all types of car insurance, a gap insurance policy must be purchased before the damage occurs in order for the claim to be covered," says Jaime Arias, a licensed car insurance agent with Dynamic Insurance Solutions. "You can't retroactively purchase gap insurance to cover your loan balance after your car is totaled in an accident."

When you purchase gap insurance, make sure you know exactly what is covered and what's not covered. Not all policies are alike.

When do I need gap insurance?

Ultimately, gap coverage comes in handy when you are "upside down" on your loan, which means your loan balance exceeds your vehicle's value.

That happens for these reasons:

  • Most cars begin to lose value the second the ink dries and they morph from "new" to "used."
  • Auto buyers are allowed to buy cars with smaller down payments -- or even no down payments.
  • Some manufacturers let buyers make no payments for an introductory period, while the car depreciates.
  • Dealerships may take trade-ins that are "upside down" and add the deficiency to the new car loan.
  • Buyers may wrap purchasing costs, such as transfer fees or extended warranties, into their loans.
  • Today's auto loans are available with much longer terms, with the average about six years. It can take years to pay the balance down below the car's cash value. The average auto loan length is now 69.5 months, according to Edmunds.com.
  • Prices are increasing -- the average price paid for a new car is close to $40,000.

These trends increase the odds that your car may lose value faster than you can pay down its loan balance. That can leave you in a financially risky position.

Who should buy gap insurance?

If you purchased or leased a new car, you should think about buying gap insurance, especially if you have a low down payment or a long loan term.

When deciding how much coverage you need, think "worst case." If you wreck your new car on your way home from the dealership, how much will you owe? What's your car's cash value?

You probably don't need gap insurance if you could write a check for the difference without even checking your balance. But if any of these statements are true, consider buying gap insurance coverage:

  • Your vehicle is leased.
  • Your down payment is less than 20% of the car's value.
  • Your trade-in was upside down (i.e. had a loan balance above the vehicle's value).
  • You drive more than most people, causing the car to lose value faster.*
  • Your auto loan's term exceeds 48 months.
  • You bought a model that depreciates quickly.

*According to the Department of Transportation, the average driver puts 13,476 miles on his or her car annually. Men drive more than women, averaging 16,550 miles a year, compared to 10,142 miles for women. If you rack up more miles annually than the average driver, your car is likely to depreciate faster than it would otherwise.

How to get gap insurance

You can't buy gap coverage unless you also have comprehensive and collision insurance. Gap insurance picks up where they leave off.

Generally, you have 12 months after purchasing a vehicle to add gap insurance to your policy. If you're buying a new car and expect to be "upside down" from the perspective of cash value to loan value as soon as you leave the lot, you should consider buying gap insurance as soon as possible.

You may be able to get the additional coverage from your current auto insurer, your dealer, or another company. Below is a partial list of gap insurance companies:

Where to buy gap insurance:

How to save on gap insurance

Over time, your auto loan balance should diminish. How quickly this happens depends on your loan amount, interest rate and term.

For example, the graph below shows the amortization of a $35,000, 60-month auto loan at 7% interest with a payment of $693.04. The blue line shows the car depreciating at a "typical" rate according to Consumer Reports, while the orange line indicates the loan's declining balance.

car value versus loan balance

Notice that during the second year, the typical car's depreciation rate has leveled off somewhat and the auto loan balance has dropped below the car's value. This illustrates why you should not just "set and forget" your auto insurance when you buy your car.

Structuring your purchase to eliminate the need for gap reduces both your financing and insurance costs. Keep these tips in mind when you go car shopping:

  • Resist loans with longer terms. Auto salespeople love to get you talking payment instead of price, but that makes it easier for you to forget how much you're actually spending. If you can't afford the payment with a 48-month loan, negotiate a lower price or choose a cheaper car.
  • Avoid excess depreciation. Some cars hold onto their values much more effectively than others. You can compare resale values on sites like Kelley Blue Book or the National Automobile Dealers Association (NADA).
  • Put at least 20% down, even if you qualify to finance more. You can avoid the need for gap and secure a lower payment, too.
  • Don't roll other charges into your auto loan. If you finance taxes, licensing, and registration, you pile on a lot of financing unrelated to the car's value. If you include purchasing costs or dealer packages like service plans and extended warranties, make sure your gap insurance covers them, because some won't.

Is gap insurance worth it?

You must be thinking, is gap insurance a good investment?

  • If you have leased or financed a car, and the loan is not paid in full
  • If your loan term is more than 48 months
  • You drive a lot

The decision on whether or not to purchase gap insurance should be made before taking ownership of any vehicle; otherwise, there may be financial repercussions for paying monthly premiums that could have been avoided by purchasing gap protection beforehand.

Gap insurance is an affordable way to protect yourself from the risk of an expensive car replacement or repair bill if your vehicle is totaled or stolen.

Can you get gap insurance on a used car?

Used car loan terms are usually shorter than new car loans. Down payment requirements are often higher, so you might not be upside down when you drive off the lot.

However, you should apply the same decision-making logic to your new-to-you car, because if it's upside down and you can't just whip out your checkbook and pay it off, an accident could wreck not just your car but also your finances.

Frequently asked questions: Gap insurance

How long can you have gap insurance?

You can have gap insurance for the duration of your loan or lease. However, you likely won't need it after the first few years if you've paid down the loan enough.

Should you cancel gap insurance if you refinance your auto loan?

Your gap coverage will almost always be canceled automatically if you refinance your auto loan.

You may be entitled to a gap insurance refund depending on the provider and the elapsed time since you bought the coverage. If you're rolling negative equity into the new auto loan, consider adding gap coverage until your loan balance drops below the car's value.

Do you need car gap insurance even if you have full coverage?

Gap insurance is an add-on to a full coverage policy. Whether or not you need gap insurance is related to the value of your car and the amount on your loan.

Can you buy gap insurance after you purchase a car?

Most people purchase gap insurance when they buy their vehicle. However, it's possible to get a gap insurance policy after you take ownership of the car.

tip iconTIP"A driver might decide to purchase gap insurance at a later point if their lender does not require gap insurance upfront, or when the driver realizes they are underinsured," says Dynamic Insurance Solutions’ Arias. "In this case, the driver can simply contact their insurance company and add gap coverage to their car insurance policy."

Can you cancel gap insurance on a new car?

If you purchase gap insurance on a new car, you are allowed to cancel it. However, if your lender requires gap insurance as part of your loan, you must keep the policy in force until you are no longer "upside down" on the loan. Before you cancel gap insurance, make sure to check the details of your loan agreement to see whether gap insurance is required, and for how long.

Can you cancel gap insurance at any time?

Yes, you are allowed to cancel a gap insurance policy at any time. You don't necessarily have to wait until the policy renews. However, you should weigh the pros and cons of canceling gap insurance before you notify your insurance carrier.

How long does it take for gap insurance to pay?

Typically, insurance companies settle a gap insurance claim within a few weeks. However, the amount of time it takes depends on the specific situation and your insurance company, so it's a good idea to check in with an agent periodically during the claim process for updates.

--with additional reporting by Gina Pogol

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