What is gap insurance and how does it work?
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BLUEPRINT
Updated 9:36 a.m. UTC Jan. 24, 2024
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Key points
- Gap insurance covers the difference between your car loan balance and what your car insurance company pays if your vehicle is totaled or stolen.
- If your vehicle is paid in full, you don’t need gap insurance.
- Car dealerships offer gap insurance but charge more than traditional insurance companies.
Imagine buying or leasing a new car only to have it totaled in an accident a few months later. You have collision insurance, so your car insurance company covers the depreciated value of your car, but the amount you still owe on your auto loan is $5,000 more than that amount.
Gap insurance covers that extra $5,000, so you don’t have to.
What is gap insurance?
Guaranteed auto protection, or “gap” insurance, is an optional coverage you may want to buy if you lease or finance your vehicle. It covers the difference between the amount you owe on your auto loan and how much your auto insurance company will pay if your vehicle is damaged, totaled or stolen.
How does gap insurance work?
If you finance a vehicle, your lender will likely require you to buy collision and comprehensive insurance, but these types of car insurance only cover your vehicle up to its actual cash value (ACV). ACV is the amount your vehicle is worth at the time your vehicle is damaged, totaled or stolen. This amount may be less than what you owe the lender.
Say for instance you owe $45,000 on your car, but after it is totaled in an accident, your insurer determines the ACV is $35,000 and issues a claim check for that amount. You’ll need to cover the remaining $10,000 of your loan, even though you are no longer in possession of the vehicle.
If you have gap insurance, you can file a claim for your remaining loan balance.
Gap insurance can be especially beneficial for drivers who purchase or lease a new vehicle. That’s because the value of a new vehicle can depreciate by up to 20% within the first year of ownership or leasing, according to the Insurance Information Institute.
Who needs gap insurance?
If you plan to finance your vehicle with an auto loan or lease, here is a checklist from the Insurance Information Institute of when you should consider buying gap insurance:
- Your down payment is 20% less than the purchase price of your vehicle.
- The term of your loan is greater than 60 months.
- You are leasing a vehicle.
- Your vehicle model is subject to quick depreciation.
- You trade in a vehicle with negative equity (when the balance of your existing vehicle loan is higher than the vehicle’s ACV at the time of trade-in) and the remaining balance on your old car loan is rolled into your new car loan.
Tip: Once you pay off your loan, don’t forget to cancel your gap insurance. This will prevent you from paying for unnecessary coverage and will likely lower your insurance premium.
How much is gap insurance?
The average cost of gap insurance is $60 a year, according to our analysis of major car insurance providers that sell gap insurance.
| COMPANY | ANNUAL COST OF GAP INSURANCE |
|---|---|
$34
| |
$38
| |
$48
| |
$51
| |
State Auto
| $52
|
$58
| |
Shelter
| $141
|
AVERAGE
| $60
|
Where you purchase gap insurance also plays a role in how much you’ll pay for a policy. Gap insurance purchased through a dealership is typically more expensive than coverage purchased directly from a car insurance company.
Is gap insurance worth it?
Gap insurance can be worth it if you finance or lease a vehicle. Although it does add an extra cost to your monthly insurance bill, it can also help you save thousands of dollars if your vehicle is totaled or stolen. In fact, some lenders require drivers to carry gap insurance as a way of mitigating risks in the event of an accident or theft.
To make gap insurance worth your investment, shop around with different insurance agencies to find the best rate.
How to buy gap insurance
Many car dealerships offer gap car insurance and allow you to roll the cost of it into your monthly loan payments. While this may sound like the simplest option, it can also be more costly.
Trusted Choice, a group of independent insurance agents and brokers, reports that dealerships can charge substantially more than insurance agencies since commissions on this type of insurance aren’t regulated. Additionally, rolling your gap insurance into your loan payment means that it is subject to interest charges.
Banks and credit unions may also provide gap insurance, but choices can be limited and will likely cost more than going with an insurance company.
The best place to look for gap insurance coverage is with your car insurance company, though some insurers, like Geico and Farmers, don’t offer it.
Shopping around and getting policy quotes from several insurers can help you find the cheapest gap insurance rate. The average cost for gap insurance is $60 per year, but Travelers offers the cheapest average rates at $34 per year.
Gap insurance FAQs
You can purchase gap insurance after purchasing a vehicle, though some auto insurance companies may have a window during which you can purchase coverage. Keep in mind that some lenders require gap insurance, so you may need to purchase it as part of your finance agreement.
If you purchased gap insurance from a car insurance company, you can typically cancel it anytime. Depending on when you cancel, you may be eligible for a prorated refund, though you may have to pay a cancellation fee.
If you purchased coverage from the dealership and rolled it into your loan or vehicle financing, you may be unable to cancel coverage. You also won’t be able to cancel your policy if it was required by your lender or lessor as part of your finance agreement.
If you paid for your gap insurance policy in full, you may qualify for a refund after canceling coverage. This is common with policies issued by both car dealerships and insurance agencies, though the latter may apply the refund as a credit to your account if you maintain other types of insurance with them.
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