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

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

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Gap insurance is an optional coverage that protects people who lease or finance their vehicles and owe more money than their cars are worth.

It's also known as guaranteed asset protection, and it helps you recover the difference between what you owe and the amount you receive from your insurance company after a total loss.

Gap insurance is only applicable if you finance your vehicle. Understanding how it works can help you calculate your potential liability and determine whether it's necessary. We always recommend that drivers compare quotes from multiple insurers to get the best rate.

What is gap insurance?

Gap insurance protects drivers who have financed or leased their cars and owe more money on the car than it's worth. This situation is sometimes called being "upside down" or "underwater."

Being upside down commonly happens if you finance a new vehicle because new cars may lose value faster than you pay off the loan.

You are especially likely to be upside down if you make a smaller down payment or opt for a long loan period, as that means your loan balance will decrease more slowly. Being upside down on your car loan isn't necessarily a bad thing, but it puts you in a position of extra financial risk.

If your new car is totaled or stolen, your comprehensive or collision coverages will cover up to the car's actual cash value. But you would still be responsible for the difference between how much you owe on the loan and the car's value. Gap insurance covers that difference.

>> LEARN MORE: Auto Insurance for Leased Cars

Pros and cons of gap insurance

Gap insurance can offer a significant degree of protection in certain situations, but it is an extra cost to consider. If you are not required to purchase gap insurance but have the option, here are some elements to consider:

Pros

  • Gap insurance means you can walk away from an accident with less financial burden.
  • You can potentially purchase a more expensive vehicle with less worry.
  • The annual cost is relatively low, quite often $100 or less.

Cons

  • At a certain point, the difference between what you owe and the car’s value will drop to the point that it might not be worth having.
  • It is an extra expense on top of monthly payments and regular upkeep.
  • If you pay a low price to begin with, it might not be necessary.

Where can you buy gap insurance?

You can buy gap insurance from most big-name car insurance companies, including State Farm, Progressive, Allstate, Esurance, Farmers, Travelers, Nationwide, 21st Century and USAA. Most companies require that drivers have comprehensive and collision coverage in order to get gap insurance, and some companies may have additional special conditions drivers must meet to qualify for it.

If you are interested in purchasing only gap insurance, some car dealerships offer standalone gap insurance coverage. However, most of the time, insurers offer better rates for gap insurance compared to dealers. While car dealers might say you are required to have gap insurance or that you must buy it from them, it is up to you to decide if or where you buy gap insurance.

What is (and isn't) covered by gap insurance?

Gap insurance can be a beneficial part of your car insurance coverage, but it only protects you in certain situations. Here's when gap coverage will (and will not) protect you:

Does gap insurance cover theft?
Yes. If you're a victim of car theft, gap coverage will pay out the difference between your comprehensive coverage and your car's value.
Does gap insurance cover a car totaled in an accident?
Yes. In situations where your car is damaged beyond repair, gap coverage will step in.
Does gap insurance cover me if my car is not totaled?
No. Gap insurance only comes into play if your car can't be fixed or it is prohibitively expensive to do so.
Does gap insurance cover my deductible?
No. Even if you have gap insurance on your car, you'll still be responsible for paying the comprehensive or collision deductible.
Does gap insurance cover bodily injury or death?
No. Gap insurance is only relevant to damage to your car, and it doesn't cover anything related to medical care, funeral costs or lost wages.

Who should get gap insurance?

Not every driver is eligible for gap insurance, and not every driver who is eligible should get it.

Gap insurance is only available if you bought your car with a loan or if you lease your vehicle. If you own your vehicle outright, you don't need to consider getting gap coverage.

Even if you financed your car, you only need gap coverage if the amount you owe is more than the car's value. The best way to determine whether you need gap coverage is to find the cash value of your car and subtract it from how much you owe.

You won't be able to find the exact amount your insurance company uses for your vehicle's actual cash value, but you can approximate your car's value by visiting a local appraiser or looking it up in Kelley Blue Book.

For example, we found that the Kelley Blue Book value of a 2017 Mini Cooper is around $13,000. If you owe $15,000 on that car, you're underwater and would benefit from gap coverage.

Calculating the gap between your car's value and what you owe is the best way to know if you need it. You may also be more likely to need gap coverage if any of the following situations apply to you:

  • Your lease or loan requires it: Gap insurance may 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 it's included in your loan or lease, and you might be able to find cheaper coverage elsewhere.
  • You made a low down payment or opted for a long lease: A low down payment or longer lease means that your car is likely to lose value faster than you are paying it off, especially in the first few years of ownership.
  • You own a luxury or high-value car: Luxury cars depreciate faster than ordinary vehicles, so if you bought a Cadillac or Lexus, you're more likely to have your loan amount eclipse the car's value.
  • You drive your car long distances: While every car loses value the second you drive it off the lot, driving a significant amount in 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.

You probably don't need to carry gap insurance forever. Once you pay down the loan to the point where it's worth more than you owe, you should remove gap coverage, as long as the terms of your lease allow it. In the event your car experiences a total loss, having gap insurance would not result in any extra payment.

>> LEARN MORE: How Much Car Insurance Do I Need?

Is gap insurance worth it?

Gap insurance is worth purchasing if the cost isn't significant and you could find yourself with a large bill to pay off a car you no longer have. 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 actual cash value of your vehicle, you may see little to no payment in the event of an accident.

However, if your car is worth considerably less than the money still owed on it, gap insurance is well worth the usually low 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.

How to tell if you have gap insurance

There are two places to check whether you already have gap insurance: your existing car insurance policy and the terms of your lease or loan. Gap coverage is sometimes sold as an add-on from the dealer when financing a car, so check to see if you're already paying for it before you add coverage.

Even if you have coverage, it's worth it to see if you can get cheaper gap insurance elsewhere, as car dealers often charge more for it.

Which companies offer gap insurance, and how much does it cost?

Most major car insurance companies offer gap insurance in some form, though many have limitations on which vehicles they will insure. Geico is the only major insurer that doesn't offer gap coverage at all.

Gap insurance through an insurance company is typically not very expensive, so we recommend drivers who would benefit from the coverage consider purchasing it.

Insurer
Does it offer gap insurance?
Limitations
State FarmYesOnly vehicles financed through State Farm Bank
ProgressiveYesUp to 25% of actual cash value (lease/loan coverage)
AllstateYesNew vehicles only
EsuranceYesUp to 25% of actual cash value (lease/loan coverage)
FarmersYesNew vehicles only
TravelersYesNew vehicles only
NationwideYes
21st CenturyYesOnly available in AZ, CO, ID, IA, KY, MT, NM, OR, NE, TN, UT, WA and WI
USAAYesOnly vehicles financed with a USAA auto loan
GeicoNo

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Cost of gap coverage

We collected quotes from Progressive and Esurance to understand how much you can expect to pay for gap coverage. In all cases, we found gap insurance to be affordable, averaging only a few dollars per month. In addition, neither insurance company asked for the remaining balance of our loan, so the price is the same regardless of how large your gap is.

Progressive
Esurance
Kelley Blue Book value
2017 Camaro convertible$5.83/month$7.67/month$16,500
2017 Mini Cooper$4.50/month$7.50/month$13,000

Car models selected are base trim levels in good condition with 15,000 miles driven.

>> LEARN MORE: Who Offers the Cheapest Car Insurance?

How to calculate gap insurance

Calculating your gap insurance only requires taking the current value of your vehicle from the remaining balance of your loan. You should be able to consult your lender as to how much you still owe, and Kelley Blue Book is a good tool for finding your car's value.

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 covers [B - A]$5,000

It's important to note the amount gap insurance covers goes down over time. At a certain point, it might be worth the risk to discontinue coverage, assuming your lender allows it.

Getting a refund for gap insurance

You don't need gap insurance once you're no longer upside down. After you have paid off enough of your vehicle's price that the amount you owe is less than the car's value, you can cancel gap coverage.

If you prepaid for coverage, then you'll be refunded any premium you haven't used. For example, if you have paid for six months of gap insurance, but your car is paid off three months later, you'll be able to get a refund for the other three months.

How long does it take for gap insurance to pay?

The amount of time between an accident and gap insurance payout can in theory be as little as five days, depending on where you live, but it is far more likely to take at least several weeks and often more than a month. Different states have different laws, and the process has multiple elements.

Generally, an insurance company takes up to 30 days to declare a vehicle a total loss, although it can take longer. After it makes a determination, the insurer will begin to process the gap payment.

You should speak to both your insurer and lender or lessor through the process to get a sense of how long it might take. Crucially, you need to find out how the timing works between your next payment and when gap insurance payment starts covering the loss.

When does gap insurance not pay?

Gap insurance won't pay in a wide variety of situations, namely anything short of a total loss. If you are in an accident in which the car is repairable, gap insurance will not pay out. Some of the situations for which you will not get a gap insurance payout include:

  • Repairs for normal wear and tear
  • If the engine fails
  • After an accident that doesn't total the vehicle
  • Money rolled over from a previously leased car
  • Injuries and medical costs
  • A rental car after an accident
  • A replacement vehicle

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