Do I need gap insurance if I have full coverage car insurance?

What is auto insurance gap coverage?

Gap insurance covers the eligible difference between your vehicle’s actual cash value and the amount you owe on its loan or lease after a covered total loss. Standard auto insurance pays the vehicle’s value at the time of the loss, while gap coverage addresses the remaining financial shortfall.

For example, when you purchase a new car, it starts to depreciate in value the moment you drive it off the dealer lot. A car typically loses 20% of its value within the first year, according to the Insurance Information Institute.

This depreciationDepreciation is the decrease in your car's value over time due to wear and tear, age and mileage. Depreciation is used to determine the actual cash value of a vehicle in the event of a total loss. poses a big risk to a car owner if the vehicle is destroyed. Typically, if a car is totaled -- or stolen -- the insurance company will only pay the claimAn insurance claim is a request you make to your insurance company for coverage after your car is damaged or you have an accident. You can file a claim online, by phone, or in writing. up to the car's current market value, which takes into account the depreciation. That means you might receive a check for less than the amount you owe on the loan.

Gap insurance "bridges the gap" between the car's market value and what you owe on your loan. This keeps you from writing a big check to cover the difference that results in the gap.

Gap insurance vs full coverage: What's the difference?

Gap insurance is not part of full coverage auto insurance. Full coverage protects your vehicle against covered collision and non-collision damage, while gap coverage protects your finances after a total loss. Full coverage pays what the car is worth. Gap coverage addresses an eligible difference between that settlement and your loan or lease balance when you owe more than the vehicle’s value.

But full coverage does not cover the gap between your car's market value and what you owe on the loan.

"If you have a covered claim, your collision coverage or comprehensive coverage would help pay for your totaled or stolen vehicle up to its depreciated value," Worters says.

To make sure you will not have to pay the difference between the check you receive from your insurer and the amount you owe on the loan, you need gap coverage. This is a standalone form of coverage that is not part of the typical full-coverage auto policy.

Gap insurance does not pay until your auto insurer declares the vehicle a covered total loss or pays a covered theft claim. It works alongside collision or comprehensive coverage rather than replacing them.

Coverage	What it pays
Liability	Injuries or property damage you cause to others
Collision	Covered crash damage to your vehicle
Comprehensive	Covered non-collision losses, including theft
Gap insurance	An eligible loan balance left after a covered total-loss settlement

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

You need gap insurance when the amount you owe is higher than your car’s value, and you cannot comfortably pay that difference after a total loss. Full coverage protects the vehicle but pays only its actual cash value. Gap coverage pays the remaining loan or lease balance.

You have a stronger need for gap insurance when you:

Made a down payment of less than 20%.
Financed the vehicle for 60 months or longer.
Rolled negative equity from an old loan into the new loan.
Bought a vehicle that loses value quickly.
Financed taxes, fees, warranties or other add-ons.
Drive many miles each year, which reduces the car’s value faster.
Lease a vehicle and the lease does not already include gap protection.
Cannot afford to pay the remaining loan balance after a total loss.

You do not need gap insurance when you own the vehicle outright. You can also drop it once your loan balance is lower than the vehicle’s value, provided your lease or finance contract allows you to do so.

How much does gap insurance cost?

Gap insurance typically costs somewhere between $20 to $60 a year. As a general rule, you will pay 5% to 6% of your comprehensive and collision coverage costs for gap insurance. Gap insurance prices vary greatly based on where you buy the product, the vehicle, the loan, and the contract’s limits.

However, you likely will only get these low rates if you purchase your policy from a car insurance company. If you purchase gap coverage through a lender or dealership, you might pay substantially more.

When do you need gap insurance?

You need gap coverage when your loan balance will fall more slowly than your car’s value. A vehicle can lose about 20% of its value during its first year, while a small down payment and long loan term leave most of the original balance unpaid. That combination creates the greatest gap risk.

"Most vehicles' value depreciates about 20% in the first year of ownership, so it's something to consider," Worters says.

There are many common situations in which gap insurance is worth considering. According to the Insurance Information Institute, they include when you:

Make less than a 20% down payment and/or finance a car for 60 months or longer
Lease a vehicle
Purchase a vehicle that depreciates quickly
Rollover negative equity from an old car loan into the new loan

In addition, there may be times when your lender insists that you purchase this coverage. For example, if you lease a vehicle, you most certainly will be required to purchase gap insurance.

FAQ: Gap insurance and full coverage

Should I get gap insurance on a used car?

You can get gap coverage on some used cars, but availability depends on the insurer, lender, vehicle age, mileage, loan amount and purchase date. It’s not limited to new vehicles. Gap coverage makes sense if your loan balance exceeds the car’s value, which can happen with small down payments, long terms or rolled-over debt.

Is gap insurance necessary?

Gap insurance is necessary if you do not have the funds to pay off what would remain on your car loan if your vehicle was totaled or stolen and the insurer wrote a check for the car's depreciated amount. It is also possible that your lender will require to you to purchase gap coverage. If you plan to purchase gap insurance, remember that it pays to shop around to get the best price.

How can I buy gap insurance?

You can buy gap insurance from your auto insurer, lender, credit union or dealership. Compare total cost, coverage limits, exclusions and cancellation terms before purchasing. Adding it through your insurer is often simpler and cheaper. Avoid financing it through a loan if possible, as that increases the total interest you’ll pay.

Does gap insurance give me money for a new car?

No, gap insurance will not pay for a new car. Gap insurance exists to cover the amount of money you owe on your car loan if your car is stolen or totaled, and your insurer writes you a check that is less than what you owe on the car loan.

What does gap insurance not cover?

Gap insurance does not cover repairs, maintenance, injuries or replacement vehicles. It only applies after a total loss when your loan exceeds the car’s value. It typically excludes late payments, fees, warranties, negative equity, and amounts above policy limits. Deductibles may also be excluded unless specifically included in your contract.