Gap insurance, also known as gap coverage or gap protection, is an optional add-on auto insurance policy that helps protect car owners from losses that can occur when their car is totaled or stolen. Gap insurance covers the difference between what your auto insurance company pays for your totaled vehicle, and what you still owe on your car loan or lease. This guide will explain everything you need to know about gap insurance, including how it works, who needs it, and whether it's worth the cost.
How Does Gap Insurance Work?
- Your car is totaled or stolen and declared a total loss by your auto insurance company. They determine the actual cash value (ACV) of your vehicle and send you a settlement check for that amount.
- If you owed more on your auto loan than your car was worth, there will be a "gap" between what your insurance paid and what you still owe the lender. This gap is typically several thousand dollars.
- Gap insurance steps in to cover the remaining loan balance, waiving the difference so you don't end up making payments on a car you no longer have.
Without gap coverage, you'd have to come up with the cash to pay off the loan balance yourself or continue making monthly payments for a car you no longer have. Gap insurance protects you from this financial loss.
Who Needs Gap Insurance?
- New car buyers - New cars depreciate quickly. If it's totaled in the first couple years, your insurance settlement may not cover the remaining loan balance. Gap insurance protects against this rapid depreciation.
- Leased vehicles - With a lease, you must return the car in good condition at the end of the lease term. Gap coverage waives any remaining payments if it's totaled or stolen.
- Buyers who made a low downpayment - The more you put down upfront, the less risk you carry of ending up "upside down" on the loan. Smaller downpayments mean gap coverage provides more value.
- Drivers who accumulated negative equity - Rolling over negative equity from a previous car onto a new loan increases the gap risk. Gap insurance becomes important protection in these scenarios.
If you put at least 20% down and keep your loan term short, you may not need gap insurance. But for most car buyers and lessees, gap coverage is a smart purchase. Read also: What is Third Party Car Insurance?
How Much Does Gap Insurance Cost?
- Where you buy it - Buying directly from your auto insurance company is often cheaper than the dealer or lender. Credit unions tend to offer the lowest rates.
- Coverage limits - Most gap policies cover up to 125% of the vehicle's value. Higher limits cost more but provide more protection.
- Loan length - Longer loan terms present more risk, so gap rates are higher on 5-6 year loans compared to 3-4 year terms.
- Your location - States like Florida and Texas with higher accident rates have pricier gap insurance premiums.
While not cheap, gap insurance costs just a few dollars per month in most cases - worthwhile protection for a few bucks a month.
What Does Gap Insurance Cover?
- Remaining loan/lease balance - Primary coverage pays the gap between insurance settlement and remaining loan balance if vehicle is totaled.
- Deductible reimbursement - Covers your auto insurance deductible, often up to $1,000.
- Replacement vehicle - Some plans cover a portion of the cost of a replacement vehicle.
- Rollover protection - Covers gap on your previous loan that was rolled into the current auto loan.
- Lease early termination fees - Waives lease termination charges if the vehicle is totaled and can't be returned.
Double check your individual policy, but those are some of the most common gaps filled by this coverage.
When Does Gap Insurance Pay Out?
- A major accident where the vehicle is totaled
- Theft or carjacking
- Fire, flood, or other disasters that destroy the vehicle
- Vandalism or damage from falling objects like trees
The total loss settlement from your auto insurer triggers gap insurance to activate. Note that gap coverage only pays in the event of a total loss - it does not apply to repairs or minor damage claims.
Gap Insurance vs. Auto Loan/Lease Coverage
- Much lower cost - Lender coverage can cost 2-3x more than policies from other providers.
- Better coverage - Most lender plans just cover the remaining loan balance, while independent gap policies include extras like deductible reimbursement.
- Easier cancellations - Cancelling lender gap insurance can be a hassle compared to cancelling an independent policy.
Unless your lender offers an unusually good deal, go with a standalone gap policy from your insurer or credit union instead.
How Long Should Gap Insurance Coverage Last?
- Keep full gap coverage for the first 2 years of your loan or lease
- After 2 years, consider dropping to buyback gap insurance if offered. This covers a smaller amount but costs less.
- Once you reach 20% equity in the vehicle, gap insurance is likely no longer needed.
Gap insurance providers will automatically cancel your policy when your loan term ends. Just be sure to reevaluate your coverage every couple years to ensure you're not overpaying.
Shopping for the Best Gap Insurance Rates
- Check with your auto insurer - They often offer discounts for bundling gap with your existing policy.
- Compare quotes from credit unions - Many offer gap insurance to their members at low group rates.
- Avoid the dealer/lender - Their gap coverage will be expensive; shop around instead.
- Ask about discounts - See if you qualify for any multi-policy, auto club member, or anti-theft discounts to lower your rate.
- Raise your deductible - Just like regular insurance, higher deductibles bring cheaper gap premiums.
- Limit loan length - Shorter 3-4 year loans cost less to insure than 5-6 year terms.
Can You Cancel Gap Insurance?
Is Gap Insurance Worth It?
Pros of Gap Insurance
- Protects against owing thousands on a car you no longer have
- Peace of mind in case of total loss from an accident or theft
- Typically costs less than $500 for 1-3 years of coverage
- Prevents credit damage from defaulting on auto loan balance
- Easy to purchase from auto insurer, credit union, or other provider
Cons of Gap Insurance
- Not needed if you make a large downpayment
- An extra cost on top of your auto loan payment
- Doesn't cover mechanical breakdowns or minor damage