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CAR INSURANCE INSIGHTS

"Do I need gap insurance if I have full coverage?" The answer is often "yes." The key question you must ask is whether you can afford to pay the difference between your car's actual value and what you owe on the loan should the car be destroyed or stolen.

Gap Insurance and Full Coverage

It is a sad fact that soon after you purchase a car and drive it off the dealer lot, it begins to depreciate in value.

Because new cars lose their value so quickly -- particularly during the first year you own them -- there may soon be a gap between how much you owe on the car loan and how much the vehicle is actually worth.

Purchasing gap insurance can protect you if your car is totaled or stolen when you owe more on the car loan than the car is worth.  

"Gap insurance helps pay the gap between the depreciated value of your car and what you still owe on the car," says Loretta Worters, vice president of media relations for the Insurance Information Institute.

Without this coverage, you may be stuck writing a check to pay off your car loan and close the financial gap between the check you receive from your insurer for the car's depreciated value and what you owe on the loan. Read on to learn more about gap insurance and whether it is right for you.

KEY TAKEAWAYS
  • Gap insurance helps to cover the difference between your car's depreciated value and what you owe on your car loan.
  • The cost of gap insurance is low, often $60 or less annually.
  • Gap insurance often is much more expensive if you buy it from a car dealership.
  • There are many things gap insurance does not cover.

What is auto insurance gap coverage?

Auto insurance gap coverage protects you when your car is totaled or stolen, and you owe more on the car loan than the vehicle is worth. Such situations likely are more common than you think.

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 depreciation 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 claim 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 protects you from this fate. It "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 should not be confused with full coverage auto insurance. The latter sounds like it would cover the entire car – and in a sense, it does. If you have full coverage, just about anything that can happen to the car is covered, from an accident that damages your car to hailstorm damage. Full coverage also reimburses you for damage you do to other vehicles and to people and their property.

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 is meant to be used in conjunction with collision coverage or comprehensive coverage," Worters says.

How much does gap insurance cost?

The cost of gap insurance differs from insurer to insurer. Just as with any auto insurance coverage, it pays to shop around to try to find the best deal.

Gap insurance typically costs somewhere between $20 to $60 a year, making it a real bargain. As a general rule, you will pay 5% to 6% of your comprehensive and collision coverage costs for gap insurance.

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.

In fact, reports suggest that some dealerships mark up the cost of gap insurance by 300%.

When gap insurance is a good idea even if you have full coverage

You might be wondering, "Do I need gap insurance if I have full coverage?" The answer is often "yes." The key question you must ask is whether you can afford to pay the difference between your car's actual value and what you owe on the loan should the car be destroyed or stolen.

In other words, you as an individual policyholder must decide whether gap insurance makes sense for you. Still, there are many common situations where gap insurance typically 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.

Do you really need gap insurance?

Whether or not you need gap insurance depends on your tolerance for risk and your financial circumstances.

Just remember that if your car is totaled or stolen and you owe more on the loan than the car is worth, you will still be responsible for paying any amount that remains between the amount of money you get from your insurance company and the amount that remains on the loan.

If you purchase gap insurance, you will not have to pay the money that falls into this "gap." If you don't have such coverage, you will need to write the check.

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

Frequently asked questions: Gap insurance and full coverage

Should I get gap insurance on a used car?

If you are looking to purchase gap insurance on a used car, you might be out of luck.

"This type of coverage is only available if you're the original loan or leaseholder on a new vehicle," Worters says.

However, your insurer may offer other ways to lower your risk of being stuck having to write a big check if your used car is stolen or totaled. Talk to your insurance agent to learn more.

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.

"Gap insurance isn't just sold at car dealerships," Worters says. "Some insurers offer gap insurance as part of a car insurance policy."

How can I buy gap insurance?

There is a good chance that the dealership where you purchased the car will try to sell you gap insurance. But this often is expensive compared to what you can get from your car insurance company.

So, it is best to talk to your insurer about what it offers for gap insurance before you purchase a car. That way, you will get a sense of how much the coverage costs and can make sure the coverage is in place when you purchase the vehicle.

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.

Are there things gap insurance doesn't cover?

It's a mistake to expect too much of gap insurance. There are several things it will not cover.

For example, if you cannot make your car payments because of a sudden financial hardship, don't expect gap insurance to help.

It also will not cover the cost of renting a car if your car is in the shop, and it won't reimburse you for a down payment on a new car. Gap insurance helps you to pay off your car loan when your car is totaled or stolen, and you owe more on the loan than the car is worth.

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