Auto Insurance Gaps: Understanding Coverage Lapse Periods

Gap insurance is an optional auto insurance coverage that applies if your car is stolen or deemed a total loss. It covers the difference between the depreciated value of the car and the loan amount owed if the car is involved in an accident. This type of insurance is especially useful if you've made a small down payment on your vehicle, have a long-term loan, or have a car that depreciates in value quickly. Gap insurance is never required by state law, though some lenders or lessors may require it.

When is gap insurance needed?

Gap insurance is needed when there is a "gap" between the current value of a vehicle and the balance of a loan or lease. This can occur when:

• A small down payment is made on the vehicle.
• The vehicle is financed for a long period.
• The vehicle is leased.
• The vehicle is purchased with negative equity from a previous loan.
• The vehicle is a make and model that depreciates faster than average.

For example, if you owe $25,000 on a vehicle that is only worth $20,000, gap insurance will cover the $5,000 gap (minus your deductible). Gap insurance is typically needed in the first few years of a vehicle's life when depreciation is highest. It is not required by any insurer or state but may be mandatory per the terms of a lease or loan agreement.

How does gap insurance work?

Gap insurance is an optional auto insurance coverage that applies if your car is stolen or deemed a total loss. It covers the difference between the amount you owe on your auto loan and the amount the insurance company pays. Standard auto insurance only pays an amount up to the value of your vehicle.

For example, if you owe $30,000 on your loan and your car is only worth $20,000, your gap coverage covers the $10,000 gap, minus your deductible. If your vehicle is totalled, your insurer would pay you $20,000 (minus your deductible) without gap insurance. With gap insurance, you'd receive the extra $10,000 needed to pay off your loan.

Gap insurance is intended to cover the loss you would suffer if your loan balance is higher than the value of the vehicle. It is particularly useful if you have a large car loan or you bought a vehicle that quickly depreciates in value. It is also useful if you have a small down payment of less than 20% on your car or if you have an auto loan longer than 60 months.

You can typically buy gap insurance from car insurance companies, banks, and credit unions. It is important to compare prices and coverage before purchasing gap insurance, as the price can vary greatly. You must have collision and comprehensive insurance in order to buy gap coverage.

Gap insurance is not required by law but may be required by your lender or leasing company. It is different from new car replacement coverage, which helps you purchase a brand new vehicle of the same make and model, or may even pay more than the value of the original vehicle if a newer model is available.

You can cancel gap insurance when you no longer need it, which is usually when your loan balance is lower than your vehicle's value.

How much does gap insurance cost?

The cost of gap insurance varies depending on several factors, such as the state, driving record, age, and vehicle. It is designed to protect automobile owners if their car is totaled or stolen, but it is not cheap. The cost of gap insurance in Florida, for example, averages $2,923 per year, according to a 2023 rate analysis by Insurance.com.

Gap insurance is typically more expensive when purchased from dealerships and lenders than from car insurance companies. Lenders and dealerships often charge a flat rate, typically between $500 and $700, while insurance companies charge an average of $20 to $40 per year when buyers bundle gap insurance into an existing insurance policy. If you want to buy a standalone policy, you can expect to pay between $200 and $300.

The type of gap insurance you choose also affects the cost. The cheapest way to purchase gap insurance is as an add-on to a full-coverage car insurance policy. If you buy it separately, it is generally more affordable to purchase it from an insurance company than from a manufacturer, dealership, or lender.

Your vehicle's actual cash value (ACV) and auto insurance claims history can also impact the cost of gap insurance. Additionally, gap insurance is usually more expensive for larger loans, as car insurance companies base their gap insurance costs on the vehicle and the driver's profile.

It is worth noting that gap insurance is not mandatory, but it might be required by your financing agreement or lease agreement. It is a good idea to carefully review the terms of your car loan or lease to see if gap insurance is necessary.

Where can you buy gap insurance?

If you're buying a new car, you can get gap insurance from the dealer or your auto insurance company. Usually, gap insurance is optional if you're financing a purchase, but it might be mandatory if you're leasing a vehicle.

Buying gap insurance from a dealer

When you buy or lease a car, the dealer will likely ask if you want to purchase gap insurance when you discuss your financing options. Buying gap insurance from a dealer can be more expensive if the cost of the coverage is bundled into your loan amount, which means you'll be paying interest on your gap coverage.

Buying 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 the cost of adding gap coverage to your existing policy. Note that you need comprehensive and collision coverage to add gap coverage to a car insurance policy.

Buying gap insurance: dealer vs. insurance company

When purchased at the dealer, gap insurance can cost several hundred dollars or more, spread equally throughout your loan payments and therefore subject to interest. When purchased through your insurer, your premium will increase (usually minimally) when you add the coverage, and you can choose to remove it when it no longer makes sense, potentially leading to a cheaper cost than if you purchased it from the dealer.

Where to buy gap insurance

You can buy gap insurance from most major insurance companies, including Progressive, Nationwide, State Farm, and Allstate. Another place where you might be able to purchase gap insurance is through your car dealership.

However, if you buy gap insurance from a dealership, you might end up paying extra because the cost is added to your principal, which is then used to calculate your interest. So, you might save money by asking your insurance company.

Is gap insurance worth it?

Gap insurance is a supplemental coverage that pays the difference between your car's actual cash value and the amount you currently owe on your loan or lease when your car is totaled in a traffic accident or stolen. It is important to note that gap insurance is optional and is only used when a new vehicle you've financed is totaled or stolen.

Gap insurance might be worth it if you:

• Owe more on your auto loan than your car is worth
• Made a small down payment or put nothing down for your new car
• Took out a loan with a term longer than two years
• Drive more than the average person in your area
• Are leasing your car
• Own a car that depreciates faster than other cars

You may not need gap insurance if:

• You made a down payment of at least 20% of the car's value at the time of purchase
• You expect to pay off your car loan in less than five years
• You financed or leased a vehicle that holds its value longer than most

Cost of Gap Insurance

The cost of gap insurance depends on several factors, including the actual cash value of your vehicle when you purchase the policy, your previous claims history, and the provider you choose. Gap insurance is typically inexpensive, costing an average of $61 per year, according to Forbes Advisor's analysis. However, if you get your gap coverage from a lender, you can expect to pay a flat fee of $500 to $700 on average. Auto insurers usually charge around $20 to $40 per month for their add-on policies.

Where to Buy Gap Insurance

You can typically buy gap insurance from car insurance companies, banks, and credit unions. You can also purchase it through your insurance provider as an add-on coverage or from a dealership or lender, who may include it in your lease or loan payments. However, buying gap insurance from a dealership can be more expensive in the long run, as you will be paying interest on the coverage.

Frequently asked questions