Gap Insurance: How Does it Work and Do I Need it?

Gap insurance—also known as guaranteed asset protection—helps you recover the difference between what you owe on your car loan or lease and the amount of compensation you’ll receive from your insurance company after a total loss. Without gap insurance, you risk losing out on thousands of dollars of insurance money if you’re involved in an accident. However, gap insurance doesn’t make sense for every driver. Understanding how gap insurance works will help you calculate your potential liability and determine whether it’s necessary or not.

What is Gap Insurance and How Does it Work?

Gap insurance provides you with coverage for the difference between what you owe on your vehicle and the worth of your vehicle should it be involved in an accident that results in a total loss. Standard comprehensive and collision car insurance policies pay for the replacement of your vehicle during a total loss—for instance—if your car is totaled or stolen. However, the policies only pay out up to the pre-agreed coverage limit or the car’s actual cash value. New cars depreciate quickly, often decreasing in value faster than the rate at which you’re able to pay down a car loan or lease. The result of a new car’s quick depreciation is a policy limit or an actual cash value of a car that is less than what is owed to a loan or leasing company.

Gap insurance ensures that you’re covered for the difference between what you owe on your car lease or loan and what your car is worth at the time of a total loss. The difference—often referred to as the gap—varies depending on a range of factors, including how quickly your car depreciates, how long your loan term is, and how large your down payment was.

Gap insurance is typically purchased in increments of time. Cancellation policies vary by company, but most insurance companies will allow you to cancel your coverage at any time. If you cancel your gap coverage before the end of your initial coverage period, you’ll likely be eligible for a refund on the unused premium.

Do I Need Gap Insurance?

You’ll want to purchase gap insurance if your coverage gap is greater than the amount you’re willing to pay out of pocket or if the amount is greater than the cost of coverage. Below, you can find the most common situations that require gap insurance:

You made a low down payment on your vehicle: The reason for the gap when you make a low down payment is that larger loans result in lower upfront principal payments. The result is a loan that decreases slower than your car depreciates. You can typically expect your car to depreciate around 20% per year in the first few years.

You drive long distances: While cars lose value the second you drive them off the lot, driving a significant amount of miles on a new vehicle decreases the value of the car a lot quicker. The more miles you drive with the car, the less it’s worth.

Your loan has a high APR or term: Similar to making a low down payment on your vehicle, a long term or high APR loan means that you’re paying principal on your loan at a slower pace. The result is that depreciation outpaces the rate at which you’re paying down your loan.

Your lease or loan requires it: Gap insurance can be required by your leasing or financing company to protect you in the event of a total loss. However, just because it’s required, doesn’t mean that it’s included in your loan or lease.

Bottom Line: Whether gap insurance is worth it or not will depend on your specific situation. Anyone who has recently purchased a car should calculate their gap to determine whether they’d be able or willing to pay that amount. If that's not the case then gap insurance is necessary. Below, we provide detailed examples of gap calculations.

How to Calculate Your Gap

To calculate your current gap you’ll need to determine the total amount you owe your leasing or financing company, the actual cash value of your vehicle, and your insurance deductible. There are several ways to get an estimate for your vehicle’s actual cash value, but we recommend receiving an in-person appraisal using a reputable nationwide network or searching for your car on Kelley Blue Book.

Once you have the three values, subtract your insurance deductible from your cars actual cash value since your deductible is money that you won’t be receiving from your insurance company. Then, subtract the result from the amount you owe your leasing or financing company. The final resulting figure is your current gap, which will change over time as your car’s value and the amount you owe decrease.

Gap Insurance Examples

For the example below, we assume that a vehicle is involved in an accident resulting in a total loss exactly two years from the date of purchase. Additionally, the car had an original value of $30,000, 20% depreciation per year, a $1,000 comprehensive and collision insurance deductible and a five year loan with a 4.21% APR.

Example #1: Assuming No Down Payment

Assuming you didn’t make a down payment on the vehicle, your gap would be $1,751. In other words, if you don’t have gap insurance, $1,751 is the amount you’ll be liable to pay your financing company. The gap is calculated by subtracting your insurance deductible from the value of your car and then subtracting the result from the balance on the loan.

Step One

Car Value After 2 Years$18,000
Insurance Deductible($1,000)
Amount Recoverable from Standard Insurance Policy$17,000
Step Two
Remaining Car Loan Balance$18,751
Amount Recoverable from Standard Insurance Policy($17,000)
What You Owe: The “Gap”$1,751

Example #2: Assuming a $3,000 Down Payment

Assuming you made a $3,000 down payment on the vehicle, there wouldn’t be a coverage gap because the insurance company would award you a payment that exceeds what you owe on the loan.

Step One

Car Value After 2 Years$18,000
Insurance Deductible($1,000)
Amount Recoverable from Standard Insurance Policy$17,000
Step Two
Remaining Car Loan Balance$16,875
Amount Recoverable from Standard Insurance Policy($17,000)
What You Owe: The “Gap”$0

Gap Insurance Providers

You can purchase gap insurance from the following providers:

  • Traditional auto insurance companies
  • Online insurance companies offering gap insurance as a stand-alone policy
  • Car dealerships

Many of the national insurance companies—excluding Geico—offer gap insurance. The policies offered by the companies below are not without a few concerns. Progressive and Esurance, for instance, will only cover 25% of the value of your car. So, if the total worth of your car is $25,000, and your gap is $7,000, Progressive and Esurance would only pay you $6,250, which leaves you to pay the remaining $750. Allstate only offers gap coverage to newly purchased vehicles and State Farm only offers it to vehicles financed through the State Farm Bank. We recommend shopping around to ensure that you’re getting a fair price. A list of national insurance companies currently offering gap insurance can be found below:

  • State Farm
  • Progressive
  • Allstate
  • Esurance
  • Farmers
  • Travelers
  • Nationwide
  • 21st Century

How Much is Gap Insurance?

Purchasing gap insurance coverage from your car insurance company will cost you approximately $20 per month. The $20 cost is typically added on to your existing auto insurance premium, which means you pay one bill. Online insurance companies offer rates that are competitive to those offered by traditional insurance companies.

However, you should avoid signing up for gap insurance through a car dealership as it will typically offer higher prices than insurance companies. The price of your gap insurance will depend on the make and model of your car, among other factors, but expect to pay a $500 flat fee for gap insurance from a car dealership.

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