Gap Auto Insurance: What's Covered?

Gap insurance is an optional auto insurance coverage that applies if your car is stolen or deemed a total loss. When your loan amount is more than your vehicle is worth, gap insurance coverage pays the difference. For example, if you owe $25,000 on your loan and your car is only worth $20,000, your gap coverage covers the $5,000 gap, minus your deductible. Gap insurance covers the difference between what you owe on a car lease or loan and the amount paid out in a total loss settlement from an auto insurer, minus your deductible.

When is it worth buying gap insurance?

Gap insurance is worth buying when the amount you owe on your car is more than its current market value. This situation is often referred to as being "underwater" or "upside down" on your car loan.

Gap insurance covers the difference between what your car is currently worth and the amount you owe on it if it is stolen or written off in an accident. This type of insurance is especially useful if you have made a small down payment on the car (less than 20%), have a long finance period (60 months or longer), or have purchased a vehicle that depreciates quickly.

For example, if you owe $12,000 on a car that is currently worth only $10,000, you may not be able to afford to pay the $2,000 difference if your car is written off. In this case, gap insurance would be worth buying to protect you from this financial risk.

You may also want to consider buying gap insurance if you have rolled over negative equity from an old car loan into a new one. This will protect you in case your new car is written off before you have had a chance to build up equity in it.

However, if you have made a large down payment on your car (20% or more) or are paying off your car loan in less than five years, you may not need gap insurance as you are less likely to owe more than the car's value.

It is important to review your loan terms and compare them to your car's estimated value over time to determine if gap insurance is worth it for your specific situation. You can use resources like Kelley Blue Book or the National Automobile Dealers Association (NADA) guide to estimate your car's value.

Additionally, gap insurance is typically only necessary for the first few years of a car loan, until the amount you owe drops below the car's value. At that point, you can usually drop the coverage from your policy.

What does gap insurance not cover?

Gap insurance does not cover the following:

• Your car insurance deductible. Gap insurance purchased through a car insurance company does not cover your collision or comprehensive deductible amount.
• Overdue payments and late fees on your car loan or lease.
• Extended warranties.
• Carry-over balances from previous loans or leases.
• Lease penalties for high mileage or excessive use.
• Charges for credit insurance connected to the loan.
• A down payment for a new car.

Gap insurance also does not cover engine failure, transmission failure, or any other mechanical repairs. It also does not cover death, injuries, or funeral costs.

How much does gap insurance cost?

The cost of GAP insurance depends on various factors, including the underwriter, your state, driving record, age, vehicle, and loan amount. 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, interest will be charged on this sum as it is 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 insurance should not exceed 5% of the loan amount as per state law. This guideline can help you determine whether the price you are quoted is fair.

When does gap insurance not pay out?

Gap insurance covers the difference between what your insurance company pays for a total loss on your car and what you owe on the loan. However, there are several reasons why a gap insurance claim might be denied or not paid out:

• The car is not a total loss: Gap insurance only pays out in the event of a total loss, which is when the cost to repair your vehicle exceeds its depreciated value. It does not cover damage that is repairable or any other situation that does not result in a total loss.
• The claim is over the limit: Some gap insurance policies 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 full amount.
• Non-payment of policy premiums: If the policy premiums have not been paid and the policy has lapsed, the gap insurance will not pay out.
• Fraud or misrepresentation: If the policyholder is found to have committed fraud or misrepresentation, the gap insurance company can deny the claim.
• Violation of the car loan or lease agreement: If the policyholder has failed to make payments or does not have the proper coverage, the gap insurance policy may not pay out.
• Waiting period: Gap insurance policies typically have a waiting period before coverage begins, during which any total loss would not be covered.

Where can you buy gap insurance?

When buying a new car, you can get gap insurance from the dealer or your auto insurance company. Gap insurance is usually 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'd be paying interest on your gap coverage. Some dealers include a cancellation period of 30 days, during which you can cancel your gap insurance and receive a full refund.

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 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.

Other places to buy gap insurance

You can also buy gap insurance from a company offering stand-alone gap insurance policies or from the bank/financial institution that offered you a loan for purchasing your car.

Frequently asked questions