Understanding The 'Gap' In Auto Insurance Coverage

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 your car and what it’s worth. You might need it if your car is worth less than what you owe on your car loan.

When to consider buying 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 type of insurance is worth considering when:

• You owe more on your car loan than the car is worth: If there is a "gap" between the current value of your car and the amount you owe on your loan, gap insurance can protect you from having to pay off the remaining loan balance in the event of a total loss. This scenario is more likely to occur if you have a long loan term, a small down payment, or a car that depreciates quickly.
• Your car loan or lease agreement requires it: Some lenders or leasing companies may require you to have gap insurance as a protective measure. In these cases, purchasing gap insurance can help you comply with the terms of your agreement.
• You want peace of mind and financial protection: If you couldn't afford to pay the difference between the amount you owe and the value of your car in the event of a total loss, gap insurance can provide financial peace of mind. It can be especially valuable if you live in an area with a high risk of car theft or accidents.
• You have negative equity in your car: If you have rolled over negative equity from an old car loan into a new loan, gap insurance can help protect you from having to pay off that negative equity in the event of a total loss. This is a common situation for drivers who frequently trade in their old cars for new ones before their loans are fully paid off.
• You have a lease vehicle: Gap insurance is generally required for lease vehicles. Leasing companies often include gap insurance in the price of the lease, but it's important to carefully review the terms of your lease agreement to confirm this coverage.

How gap insurance works

Gap insurance, or Guaranteed Asset Protection insurance, is an optional add-on coverage that can help certain drivers cover the difference between the financed amount owed on their car and the car's actual cash value (ACV) in the event of a total loss. This can include instances where the car is stolen and not recovered.

Let's say you buy a new car and take out a loan of $30,000 to cover the cost. Over the next few years, you make all your payments, but the car's value has decreased to $20,000 due to depreciation. Unfortunately, you still owe $25,000 on your loan, leaving a gap of $5,000. If your car is then involved in an accident and is declared a total loss, your standard insurance policy will only pay out the car's current value, leaving you with a $5,000 shortfall. This is where gap insurance comes in. With gap insurance, your insurer would pay the $5,000 gap, minus your deductible, ensuring you can pay off the remaining loan amount.

It's important to note that gap insurance only applies when there is a gap between the amount owed on the car loan and the car's value, and it is typically only available for brand-new vehicles or models less than three years old. Additionally, to qualify for gap insurance, you usually need to have comprehensive and collision coverage on your policy.

Gap insurance can be purchased from car insurers or dealers, but it is often more expensive to buy it from a dealership. Some lenders and leasing companies may require you to purchase gap insurance, and dealerships may automatically add it to your loan, although you can decline this coverage.

The cost of gap insurance varies depending on factors such as the current value of your car, the state you live in, and your previous insurance claims. It is generally more expensive to purchase gap insurance from a dealership than from an insurer, and it is often added to your auto loan, resulting in additional interest charges.

In summary, gap insurance provides financial protection by covering the difference between the amount owed on a car loan and the car's actual value in the event of a total loss. It is designed for drivers with outstanding loan balances, helping them avoid steep out-of-pocket costs.

The cost of gap insurance

Cost by Provider

Gap insurance is typically purchased from either an insurance company or an auto dealership. Insurance companies offer gap insurance at a lower cost than dealerships and lenders. Insurance companies charge an average of $20 to $40 per year for gap insurance when bundled into an existing insurance policy. This option is recommended as it can save you at least 50% compared to purchasing at a dealership. The average cost of gap insurance from an insurance company ranges from $35 to $208 per year.

Dealerships and lenders charge higher prices for gap insurance, typically selling it for a flat rate between $500 and $700. Additionally, the cost gets rolled into your loan, resulting in interest payments on top of the already high price.

Cost by Vehicle

The make and model of your vehicle also impact the cost of gap insurance. A $40,000 Toyota, for example, may cost around $50 or less per year for gap coverage due to its low depreciation rate. In contrast, a $100,000 Range Rover may cost $150 or more per year for gap coverage due to its high cost and quick depreciation rate.

Other Factors

The state you live in and your previous car insurance claims history can also influence the cost of gap insurance. In California, for instance, gap insurance costs an average of $2 to $30 per month, depending on the provider and the vehicle being covered.

When to drop gap insurance

Gap insurance is a smart purchase when you first buy a car, especially if it is brand new, as it covers the difference between what you owe on a car and what the insurance company will pay out if it is a total loss. However, there are times when it makes sense to cancel gap insurance.

Firstly, if your car loan balance is less than your vehicle's actual cash value, then gap insurance is no longer necessary. This usually happens after about two years of payments. At this point, you are essentially paying for coverage that you will never use, even if your car is stolen or written off.

Secondly, if you pay off your loan early, or trade or sell the vehicle, then you no longer need gap insurance.

Thirdly, if you have paid too much for coverage, or need to lower your insurance premiums to save money, then it makes sense to cancel gap insurance.

Before cancelling gap insurance, it is important to review your policy to check for any cancellation fees or penalties, and to ensure that cancelling does not violate the terms of your lease or finance agreement. It is also a good idea to confirm that the car's actual cash value is less than what you owe, so that you won't be left out of pocket if your vehicle is written off.

To cancel gap insurance, you will need to contact your gap insurance provider, which is often a lender, car dealership, or car insurance company. You may be entitled to a refund for any unused gap insurance premium, although this will depend on how long it has been since the car's purchase.

When gap insurance doesn't pay

Gap insurance is a type of auto insurance that covers the difference between the amount of compensation you receive for a totalled car and the amount you owe on your financing or lease agreement. It is designed to protect you financially when you owe money on a depreciated vehicle.

Gap insurance won't pay out in the following scenarios:

• If the damage to your vehicle is repairable and it is not a total loss
• If the claim is over the limit
• If the policy premiums haven't been paid
• If the policy has lapsed due to non-payment when the total loss occurs
• If the claim is denied due to fraud or misrepresentation
• If the claim isn't covered by the policy
• 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
• If the policyholder is within the waiting period before coverage begins

Additionally, gap insurance does not cover:

• Your car insurance deductible
• 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

Frequently asked questions