Gap Insurance: What's Covered?

Gap insurance is an optional form of auto insurance that covers the difference between the value of your car and the amount you owe on it, in the event that your car is stolen or deemed a total loss. This type of insurance is useful for those who have a large car loan or a vehicle that depreciates quickly in value. It is not a legal requirement, but it may be required by your lender or lessor. Gap insurance does not cover vehicle repairs, personal injuries, or other accident-related expenses.

When is gap insurance worth it?

Gap insurance is a supplemental auto coverage that can be added to your existing insurance policy. It is worth considering in the following scenarios:

• Small Down Payment: If you made a small down payment when purchasing your vehicle, you might want to consider gap insurance. A smaller upfront payment means you could quickly owe more on your car loan than the car is worth, creating a "gap" that gap insurance can cover.
• Long Finance Period: If you have a long-term car loan, such as 60 months or more, your car's value is more likely to depreciate faster than your loan balance, leading to a "gap."
• Quick Depreciation: Some vehicles depreciate faster than others. If you purchase a vehicle that depreciates quickly, gap insurance can provide valuable protection.
• Low Resale Value: If your financed car has a low resale value, it may be worth considering gap insurance to protect against the potential "gap" between its value and your loan amount.
• High Mileage: If you plan to put a lot of miles on your car, this can significantly impact its value over time. Gap insurance can be beneficial in such cases.
• Lease Requirements: Some auto leases require gap insurance as a protective measure, and it may already be included in the lease price.
• Loan Requirements: Certain lenders or loan providers may require gap insurance as a condition of your car loan.

In general, gap insurance is worth considering if you owe more on your car loan than the car's current value or if you anticipate that situation arising in the future. It provides added financial security and peace of mind, ensuring you don't have to pay out of pocket if your vehicle is totaled or stolen.

What does gap insurance cover?

Guaranteed Asset Protection (GAP) insurance is an optional add-on product that covers the difference between the amount you owe on your auto loan and the amount your insurance company pays if your car is stolen or deemed a total loss. This type of insurance is designed for people who finance or lease their vehicles.

GAP insurance covers what is owed on a car after a total loss, whether that's the result of an accident or vehicle theft. It is important to note that GAP insurance does not cover costs related to vehicle repairs, personal injuries, or other accident-related expenses. It also does not cover your deductible, the excess, or additional charges related to your loan, such as finance or excess mileage charges.

For example, if you owe $25,000 on your loan and your car is only worth $20,000, GAP insurance will cover the $5,000 gap, minus your deductible. GAP insurance is intended to cover the loss you would suffer if your loan balance is higher than the value of the vehicle.

GAP insurance is typically offered by dealers, lenders, and insurers, and the cost can vary depending on the provider. It is important to compare prices and coverage before purchasing GAP insurance.

When does gap insurance not pay?

Gap insurance is an optional product that covers the difference between the amount you owe on your auto loan and the amount the insurance company pays if your car is stolen or deemed a total loss. However, there are certain situations in which gap insurance will not pay out.

Firstly, gap insurance does not cover any damage that is not a total loss. In other words, it does not reimburse the costs of normal maintenance or repairs after a car accident. It is important to note that gap insurance is only applicable if the car is a total loss, which can occur when the cost to repair the vehicle exceeds its depreciated value.

Secondly, gap insurance policies may have a limit on the amount of the claim, usually a percentage of the vehicle's value. If the claim amount exceeds this limit, the policy will not cover the excess amount.

Thirdly, if the policy premiums have not been paid and the policy has lapsed due to non-payment when the total loss occurs, the policy will not provide any coverage. Additionally, if the policyholder is in violation of the terms of their car loan or lease agreement, such as failing to make payments or not having the proper coverage, the gap insurance policy may not pay out.

Lastly, gap insurance does not cover additional charges related to the loan, such as finance or excess mileage charges. It is also worth noting that gap insurance does not include deductible reimbursement, so policyholders may still be responsible for the deductible amount even with gap insurance coverage.

How much does gap insurance cost?

The cost of gap insurance depends on various factors, including the underwriter, your state, driving record, and vehicle. Dealerships and lenders typically charge higher prices for GAP insurance than car insurance companies. Dealerships and lenders often sell GAP insurance for a flat rate between $500 and $700, which are the highest rates for this type of policy. Additionally, you will pay interest on this sum as it will be rolled into your loan.

On the other hand, insurance companies offer GAP insurance at a much lower rate, usually between $20 and $40 per year when bundled with an existing insurance policy. This option only increases your comprehensive and collision insurance cost by about 5-6% on average. If you prefer a standalone GAP insurance policy, you can expect to pay between $200 and $300.

In Texas, the cost of gap coverage should not exceed 5% of the loan amount by law. This guideline can help you determine whether the pricing you receive from dealerships is fair.

How do you get gap insurance?

Gap insurance is an optional coverage that pays the difference between what your vehicle is worth and how much you owe on your car loan at the time it's stolen or totaled. This coverage supplements a comprehensive or collision car insurance payout, which can only be as high as your car's value.

You can generally only add gap insurance to your policy if you still owe money on the vehicle or lease. There are two main ways to buy gap insurance:

From your auto insurer

You can typically add gap coverage to an existing car insurance policy or a new policy, as long as your loan or lease hasn't been paid off. Buying gap insurance from an insurance company may be less expensive, and you won't pay interest on your coverage. If you already have car insurance, you can check with your current insurer to determine how much it would cost to add gap coverage to your existing policy. Note that you need comprehensive and collision coverage in order to add gap coverage to a car insurance policy.

Through the dealership or lender

Your car dealer may offer to sell you gap insurance on your new vehicle. However, most car insurers also offer it, and they typically charge less than the dealer. On most auto insurance policies, including gap insurance with collision and comprehensive coverage adds only about $20 a year to the annual premium.

If you buy through your dealership or lender:

Check your auto loan contract to see if you're required to have gap insurance — not all lenders require it. However, your lender will generally require you to buy comprehensive and collision coverage.

A dealer may automatically include gap insurance if you lease your car, so make sure to check your lease agreement.

If you already bought gap insurance from your dealer and want to buy it from your insurer, you may be able to remove it from your car loan contract. Make sure you have coverage during the transition if you switch providers.

When to get gap insurance

You don't need gap insurance unless you lease a vehicle or have a loan. You also don't need it if your loan is paid down below the value of your car.

But if you do have a lease or loan, you may want to think about whether you can afford to pay the difference between the amount you still owe and the value of your car. If you couldn't make that payment, or don't want to deal with that financial stress in an emergency, then you'd probably benefit from having gap coverage.

Drop gap coverage when your car loan is less than the current value of your car. Online pricing guides like the Kelley Blue Book can give you an idea of how much your car is worth. Insurers might not drop it automatically, so you may need to remove it.

Frequently asked questions