What is Gap Insurance and is it Worth it?

If you crash a leased or financed car, gap insurance covers the difference between the actual cash value of the vehicle and the amount you owe on your loan.
Written by Andrea Barrett
Edited by Jessica Barrett
If your car is totaled or stolen, gap insurance is an optional
car insurance
coverage that covers the difference between the actual cash value of your vehicle and the amount owing on your loan at the time of the incident.
  • Gap insurance mitigates your financial responsibility if your vehicle is declared a total loss and you owe more on your car loan than the vehicle is worth.
  • Gap coverage is worth it if you lease or finance a car and your loan amount is greater than the cash value of your car.
  • You don't need gap insurance if you don’t have an auto loan.
  • You don’t need gap insurance forever—once your loan amount is less than the value of your car, you can drop gap insurance.

Gap insurance covers what you owe on your car loan after a total loss

If you’ve recently leased or financed a new car, the value of your vehicle dropped when you drove off the dealership lot and you likely owe more money than your car is worth. This is known as being upside-down on your car loan.
But if your car is totaled or stolen, you’ll still have to pay off the remainder of your car loan—even if your insurance payout isn’t enough.
Gap insurance—also known as guaranteed asset protection—is an optional
type of insurance
that pays for the difference between what your vehicle is worth and the amount owing on your lease or loan if the vehicle is declared a total loss. It usually supplements a full-coverage (comprehensive or collision) payout, which will only be as high as the car’s actual cash value.

How gap insurance works

If you’re leasing or financing a car,  your lender will require you to have collision and/or comprehensive car insurance until you pay off your loan. While these policies protect you from many risks, they only cover the
actual cash value
of your vehicle—the market value of your car at the time of the incident.
Gap insurance is an optional coverage that covers the “gap” between how much you owe on your loan and what your insurance will pay. 
Let’s take a look at an example:
  • Let’s say you were in an accident and your car was totaled. At the time of the incident, your car was worth $25,000, but you have $35,000 outstanding on your car loan. At this point, you owe more than your car is worth. 
  • Your collision insurance will pay for the value of your car at the time of the accident minus your $1,000 insurance deductible. 
  • Your insurance provider will pay $24,000 to your lender, but there is still $11,000 left on your loan. 
  • This is where gap insurance kicks in to cover that $11,000 gap—so you don’t owe money on a totaled car.

You should get gap insurance if you owe more than your car is worth

Investing in gap insurance is a good idea if you have a new car that’s leased or financed and currently owe more than your car is worth. 
You should buy gap insurance if:
  • You lease or finance a car
  • Your loan term is five years (60 months) or more
  • The down payment for your car was less than 20%
  • You rolled negative equity from your previous car loan into your new car loan
  • You have a model that depreciates faster than the average vehicle 
You might not need gap insurance if:
  • Your loan amount is less than the car’s value (or only slightly more)
  • You can afford to pay the difference between the loan amount and the car’s cash value out of pocket
Gap insurance isn’t forever. Once the amount on your car loan is less than the car’s actual cash value or just slightly more, you no longer need gap insurance and you can call your insurance provider to cancel coverage. 
You should also cancel gap insurance if you sell your vehicle. 

Gap insurance usually costs less than $50 per year

Compared to the cost of a standard car insurance policy, gap insurance is pretty cheap. On average, most insurers charge less than $50 a year for coverage—but your exact cost will depend on the value of your car. 
That said, the cost of gap insurance ranges considerably between providers. And you’ll need
collision coverage
, which adds extra costs to your monthly costs. 
Be mindful that buying gap insurance coverage from a car dealer is often significantly more expensive than buying it through your insurance provider:
  • Lenders typically charge a flat fee for gap insurance—and you’ll pay interest on it if it’s lumped into your loan payments
  • Insurance providers charge a monthly fee
  • You could pay upwards of $500 yearly for a gap insurance policy through a car dealership or around $50 through your auto insurance company
To find the best insurance company, compare car insurance quotes from several car insurance companies using an online comparison tool before committing. That way, you can feel confident you’re not overpaying. 

Many major insurers sell gap insurance

Most major insurance providers offer gap insurance as an add-on coverage to your auto insurance policy, though you’ll need full-coverage insurance to get it.
Here are some of the most popular options:

3 alternatives to gap insurance

If you’re not sold on getting gap insurance but still want financial protection, you have a few options.

New car replacement coverage

New car replacement coverage
is an optional add-on that gives you money for a new car of the same make and model—minus your deductible—rather than the actual cash value or depreciated value of your car if it’s totaled.
Here are a few popular insurance companies that offer new car replacement insurance:

Better car replacement coverage

This is similar to new car replacement coverage but reimburses you with enough money to buy a newer or better model of your totaled vehicle. 
Few insurance providers offer this add-on, but it’s worth considering if you want an upgrade from your current model and own your car.
Liberty Mutual
offers better car replacement coverage, but it comes with parameters. They’ll give you the money to buy a new car, one model year newer with 15,000 fewer miles than your current vehicle. For example, if your totaled car was a 2020 model with 40,000 miles, Liberty Mutual will give you the money for a replacement 2021 model with 25,000 miles on it.

Loan/lease payoff coverage

Loan or lease payoff coverage is similar to gap insurance but offers some coverage beyond your vehicle’s actual cash value if it’s stolen or totaled. 
Check out the differences between loan/lease payoff insurance and gap coverage:
Loan/lease payoff coverage
Gap insurance
Doesn't cover deductibles 
Some insurers may cover deductibles
Pays up to 25% of the vehicle’s actual cash value
Pays the difference between the vehicle’s actual cash value and the outstanding loan balance
Gap insurance is more flexible than loan/lease payoff coverage, so if you want to reduce out-of-pocket expenses, gap coverage is a better pick.
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Depreciation is when the value of your car decreases over time. Depreciation is often most significant when you drive a brand-new car off a lot or are involved in an accident, but it continues over time. 
Generally, a new car loses about 20% of its value after the first year and roughly 10% to 15% every year after. After five years, a vehicle is worth about half of what it was purchased for.
A vehicle manufacturer warranty covers breakdown and repair costs while gap insurance provides coverage in case your vehicle is totaled or stolen. 
If you’re considering gap insurance, keep in mind that it’s not as comprehensive as other coverages and excludes the following:
  • Damaged vehicles that are repairable
  • Other people’s totaled vehicles
  • Injuries 
  • Comprehensive or collision deductible
Yes—you can cancel gap insurance anytime by contacting your insurance provider. That said, it's not recommended to cancel your coverage until the amount owing on your loan is less than the cash value of your vehicle.
If you cancel your gap insurance, most insurers will offer a pro-rated refund based on how long you’ve had the coverage. If you purchased insurance through a dealership, the cost is rolled into your loan and you may not be able to cancel the coverage.
Maybe. Gap insurance is complementary to a full-coverage auto insurance policy—it doesn’t replace it. If your vehicle is totaled or stolen, gap insurance will cover the difference between what your collision or comprehensive coverage pays and the balance on your car loan.
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