Is Gap Insurance Worth It?

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Gap insurance is an optional coverage you can add onto your current comprehensive and collision policy. Gap insurance actually stands for guaranteed asset protection, and it will help cover the difference between the actual cash value of your vehicle and the amount you still owe on your auto loan if your car is a total loss.

This type of coverage is fairly cheap compared to the cost of car insurance as a whole, so it is worth considering if you are currently "upside down" on your auto loan. Being "upside down" means you currently owe more on your loan than the car is worth. However, it's important to assess your current auto debt and determine if gap insurance is worth purchasing.

What is gap insurance?

In the event that your car is totaled or stolen, gap insurance will cover the "gap" between how much you owe on your car and the actual cash value. This can increase the payout you receive from comprehensive and collision insurance. Some gap coverage will even cover your deductible.

When you get into an accident that totals your car, your insurance will typically only pay you the actual cash value (ACV) of your vehicle. The ACV is the value of a car adjusted for depreciation, which will ultimately be determined by your insurer. A new car will lose considerable value as soon as it's driven off the car lot, often by 20% to 30%.

Your car's value will continue to depreciate — or lose value — as it ages and the more you drive it. This means that the amount your insurer will pay you for a total loss could be notably less than the amount of money you owe on your car loan.

The following table shows an example of how gap insurance can help cover the difference:

Car's actual value [A]$15,000
Amount you owe on your auto loan [B]$17,000
Gap insurance will cover [B - A]$2,000

Is gap insurance necessary?

Gap insurance is a good idea for those who are "upside down" on their auto loan. Because of this, gap insurance is only necessary for those who finance their vehicle. Sometimes, drivers will owe more on their lease or auto loan than the car is worth, which is where gap insurance can help. The amount of time you can be "upside down" on your loan can vary greatly due to a variety of factors, including:

  • Putting little-to-no money down when purchasing the vehicle
  • Borrowing more money than the purchase price of the car
  • Taking out a long-term loan
  • The make and model of your vehicle

All cars will depreciate fairly quickly in the first year; however, certain models will depreciate faster.

Should I get gap insurance?

Only you can decide if gap insurance is worth the money. It's important to do the math, and determine how "upside down" you are on your current auto loan. If your loan payment is close to the ACV of your vehicle, you may see little to no payments.

However, in this example, you can see how gap insurance can potentially save you thousands of dollars if your car is totaled or stolen:

Actual cash value of your vehicle [A]$15,000
Amount you owe on your auto loan [B]$20,000
Gap insurance will cover [B - A]$5,000
Gap insurance annual costEstimated gap insurance annual cost

Many policyholders don't want to purchase additional coverage if it's not needed. Remember, your "gap" is shrinking as your car depreciates and you continue to make monthly loan payments. Use a source like Kelley Blue Book to figure out how much your car is worth.

Do I need gap insurance?

You only need gap insurance if your lender requires it. It's important to check your car lease before paying for coverage you may already have. If you own your car or owe less on your auto loan than your car is worth, then you don't need gap insurance. Gap insurance makes the most sense if you:

  • Lease your vehicle
  • Own a particular vehicle that depreciates quickly
  • Put a lot of miles on your vehicle annually
  • Put down less than 20% when you bought the car
  • Have a loan payoff period of five years or more

Average cost of gap insurance

Gap insurance is an optional coverage but can be fairly cheap. If you purchase it through your car insurance in addition to comprehensive and collision coverage, it can cost you an average of $20 a year, according to the Insurance Information Institute. There are a few ways to buy gap insurance, including through your:

  • Insurance provider
  • Car dealership or lender
  • A third party company that sells exclusively gap insurance

Purchasing gap insurance through a car dealer may increase the price, so it's important to shop around and compare quotes.

How to buy gap insurance

The cheapest way to buy gap insurance is through an insurer provider. However, not all car insurance companies provide gap insurance or offer coverage in every state. Below, we have outlined a few large insurers with their own gap insurance programs available.

Allstate

Allstate's Guaranteed Asset Protection is a great addition for policyholders.
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Allstate's Guaranteed Asset Protection is gap insurance that will provide coverage on both new and used cars valued up to $100,000. Luckily, Allstate will also reimburse your deductible up to $1,000 and cover losses up to $50,000.

Progressive

Progressive's loan/lease payoff is best for customers with a significant difference in their car's actual cash value and the amount they owe on their auto loan.
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Progressive offers an alternative to gap insurance called a loan/lease payoff, which will pay you a certain percentage of your car's value. Progressive will cover up to 25% of the vehicle's actual cash value and only costs about $5 a month to add to your current comprehensive and collision insurance policy.

State Farm

Your car needs to be financed through State Farm Bank to be eligible for Payoff Protector.
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State Farm's Payoff Protector provides protection similar to gap insurance. If your car is a total loss, State Farm Bank will look at both your final settlement and how much you owe on the car. Then, it will cover any remaining principal balance for you.

USAA

USAA's Total Loss Protection is exclusive to military members and their families.
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USAA's gap coverage is called Total Loss Protection and will cover up to $50,000 in losses and an additional $1,000 of your deductible. Remember that USAA is an exclusive insurer for active or retired military members and their families.

Alexandria Bova

Alexandria Bova is a Technical Writer for ValuePenguin, primarily focused on the auto insurance industry. Her previous writing on personal finance topics covered the housing and job markets, education and healthcare, providing resources and advice to consumers looking to save, manage and make money. Alexandria's work has been previously published on MSN, Yahoo Finance and GOBankingRates.

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.