Full Insurance Vs Gap Insurance: What's The Difference?

Gap insurance is an optional form of auto insurance that covers the difference between the value of a car and the amount still owed on it in the event of theft or a total loss. It is not the same thing as full insurance, which is a collection of insurance types covering collision damage, non-collision damage, and liability claims. While full insurance does not always include gap insurance, it is possible to add gap insurance to a car that already has comprehensive and collision coverage.

What is gap insurance?

Gap insurance is an optional form of financial protection for car owners. It covers the difference between the amount owed on a car loan or lease and the vehicle's market value in the event of an accident, theft, or total loss. This type of insurance is particularly useful if you've made a small down payment (less than 20%) and/or have a long payoff period, as you may owe more than the car's current value.

Gap insurance is intended to protect car owners from financial loss in the event of an accident or theft. When you buy or lease a new car, it starts to depreciate in value immediately; most cars lose 20% of their value within the first year. Standard auto insurance policies typically only cover the depreciated value of the car, leaving a "gap" between what the insurance pays out and what the owner still owes on their loan or lease. This is where gap insurance comes in—it covers that difference, ensuring the owner doesn't suffer a financial loss.

For example, let's say you purchase a new car with a sticker price of $28,000 and make a 10% down payment, bringing your loan cost to $25,200. With a five-year loan and a 0% financing deal, your monthly payment is $420. After a year, you've paid $5,040 and still owe $20,160. If your car is then involved in an accident and is declared a total loss, your insurance company will calculate the current value of the vehicle, which may be significantly less than what you paid for it a year ago. If your car has depreciated by 20%, its value is now $22,400. Your standard insurance will cover this amount, but you're still left with a balance of $2,240 on your loan. This is where gap insurance comes in—it would cover that remaining balance, ensuring you don't suffer a financial loss.

Gap insurance is typically offered by car dealers when you purchase or lease a vehicle, but it can also be added to your existing auto insurance policy, often for a much lower cost. According to the Insurance Information Institute, gap insurance can be added to your comprehensive auto insurance policy for as little as $20 a year. However, it's important to note that gap insurance is not mandatory and may not be necessary if you've made a substantial down payment or are paying off your loan in a short period.

When is gap insurance worth it?

Gap insurance is worth it in several scenarios. Firstly, if you have a small down payment, a long finance period, or a vehicle that depreciates quickly, gap insurance is a good idea. It is also worth considering if you owe more on your car loan than the car is worth, as gap insurance covers the difference between the amount owed and the car's value in the event of a total loss. This is especially important if you are unable to afford the potential out-of-pocket costs that may arise without it.

Additionally, if your car loan or lease agreement requires gap insurance, you should purchase it. While it is not always mandatory, gap insurance provides financial protection in case of a total loss, and it is relatively inexpensive compared to the potential costs it can help you avoid.

However, if you have a large down payment, a short finance period, or a vehicle that holds its value well, you may not need gap insurance. It is also unnecessary if you own your car outright or if you owe less on your car loan than its current value, as there is no "gap" to cover.

In summary, gap insurance is worth considering if you have a small down payment, a long finance period, a vehicle that depreciates quickly, or if your loan or lease agreement requires it. However, if you have a large down payment, a short finance period, or a vehicle that holds its value, you may not need it. Ultimately, the decision depends on your financial situation and the specific terms of your car loan or lease.

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 is intended to cover the difference between the amount you owe on your auto loan and the amount the insurance company pays if your car is stolen or totalled.

Here's how it works:

If your vehicle is totalled in a situation covered by collision or comprehensive insurance, the maximum claim payout from your insurer is the value of the vehicle right before the incident. Gap insurance, sometimes called loan/lease coverage, covers the difference between what you owe and the value of your totalled or stolen vehicle.

You must have collision and comprehensive insurance to buy gap coverage. When you file a qualifying claim, your comprehensive or collision coverage will pay the actual cash value (ACV) of your vehicle, minus your deductible. Your gap coverage will then pay the difference between your vehicle's ACV and the outstanding balance of your loan or lease.

For example, if you owe $25,000 on your loan and your car is only worth $20,000, your gap coverage will cover the $5,000 gap, minus your deductible. If the vehicle is totalled, your insurer would pay you $25,000 (minus your deductible). Without gap insurance, you'd only receive $20,000 (minus your deductible).

Gap insurance doesn't cover other property or injuries resulting from an accident, nor does it cover engine failure or other repairs. It also doesn't cover additional charges related to your loan, such as finance or excess mileage charges.

You can typically buy gap insurance from car insurance companies, banks and credit unions. It is much cheaper to buy gap insurance from a car insurance company compared to a car dealership. The cost of gap insurance could be rolled into your car loan, but that means you'll also be paying interest on it.

Gap insurance is worth it if you owe more on your car loan or lease than what the vehicle is worth.

How much does gap insurance cost?

The cost of gap insurance depends on the underwriter. Dealerships and lenders charge higher prices for gap insurance than car insurance companies. Lenders and dealerships sell GAP insurance for a flat rate, typically between $500 and $700, which are the highest rates for this type of policy. Plus, you will pay interest on the sum since it will be rolled into your loan.

Insurance companies, on the other hand, charge an average of $20 to $40 per year for gap insurance when buyers bundle it into an existing insurance policy. This will only increase your comprehensive and collision insurance cost by about five to six per cent on average, making it a lot more affordable. If you want to buy a standalone gap insurance policy, you can expect to pay between $200 and $300.

According to Forbes Advisor's analysis, the average cost of gap insurance is $61 per year.

When is gap insurance not worth it?

Gap insurance is not worth it in the following scenarios:

• If you are not financing or leasing your car, gap insurance is unnecessary. Gap insurance is only required if you owe more on your car loan or lease than the car is worth.
• If you can afford to pay the difference between the amount owed and the car's value, gap insurance is not worth it.
• If the amount you owe is less than the car's value, or only slightly more, gap insurance is not worth it as there will be little to no gap insurance payout possible.
• If you have made a down payment of at least 20% on the car when you bought it, you may not need gap insurance as there is little chance of being upside down on your loan.
• If you are paying off the car loan in less than five years, gap insurance is not necessary.
• If your vehicle is a make and model that historically holds its value better than average, gap insurance may not be worth it.
• If you sell your car, you should cancel your gap insurance.

Frequently asked questions