Gap Insurance: What It Covers

GAP insurance stands for guaranteed asset protection insurance. It is an optional type of auto insurance that covers the difference between the amount of compensation received for a totalled car and the amount still owed on the financing or lease agreement.

When to consider buying GAP insurance

The acronym "GAP" in "GAP insurance" stands for guaranteed asset protection. GAP insurance is a type of auto insurance that covers the difference between the amount reimbursed by a driver's car insurance policy and the amount they owe on their financing or leasing agreement.

• You made a small down payment: If you made a down payment of less than 20% on your vehicle, you may want to consider GAP insurance. A small down payment can result in a larger gap between what you owe and the depreciated value of the car.
• You have a long-term loan: If you have a car loan with a term of 60 months or longer, GAP insurance may be a good idea. Long-term loans typically take longer to reach the break-even point, where the loan balance and the car's value begin to equalize.
• You leased the vehicle: If you are leasing your vehicle, carrying GAP insurance is generally required. Leasing contracts often include GAP coverage automatically, but it's important to review the terms of your lease agreement.
• You purchased a vehicle that depreciates faster than average: If you buy a car that depreciates in value more quickly than the average, you may want to consider GAP insurance. This includes vehicles like luxury sedans, SUVs, and electric vehicles.
• You rolled over negative equity from a previous loan: If you have rolled over negative equity from an old car loan into your new loan, GAP insurance can protect you from potential financial losses.

It's important to note that GAP insurance is optional and not required by state law. However, some lenders or leasing companies may require it as a condition of your financing or leasing agreement. Additionally, you may be able to skip GAP insurance if you made a substantial down payment (20% or more) or if you plan to pay off your car loan in less than five years.

What does GAP insurance cover?

GAP insurance, or guaranteed asset protection, 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.

In other words, GAP insurance covers the "gap" between your car's actual value (not the amount you paid) and your outstanding lease or loan balance. For example, if you finance a $25,000 car and a few months later it is in an accident and declared a total loss, your insurance company will pay out the car's actual cash value, which may be less than the amount you still owe on the loan. GAP insurance will cover this difference, so you don't have to pay it out of pocket.

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.

It is important to note that GAP insurance is not required by law and is only useful in specific situations, such as when your car is stolen or declared a total loss. It is also not necessary if you own your vehicle outright or have a large down payment, as there would be no "gap" between the value of the car and the loan amount.

How much does GAP insurance cost?

The cost of GAP insurance depends on several factors, including the underwriter, your state, driving record, and vehicle. Dealerships and lenders typically charge higher prices for GAP insurance than car insurance companies.

Dealer and Lender Prices

Dealers 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 the sum since it will be rolled into your loan.

Insurance Company Prices

Insurance companies usually charge lower rates for GAP insurance, especially when bundled with an existing insurance policy. Adding GAP coverage to a car insurance policy with collision and comprehensive insurance typically increases the premium by around $40 to $60 per year. When bundled with an existing policy, GAP insurance costs an average of $20 to $40 per year. Standalone GAP insurance policies from insurance companies are also available, typically costing a one-time fee of $200 to $300.

Factors Affecting Cost

Factors that can influence the cost of GAP insurance include the vehicle's actual cash value (ACV) and auto insurance claims history. The cost of GAP insurance can also depend on the loan amount, with larger loans potentially leading to higher insurance costs.

Where can you buy GAP insurance?

When buying a new car, you can get GAP insurance from the dealer or your auto insurance company. It is usually optional if you're financing a purchase but may 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.

Buying GAP Insurance from an 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 Options

You can also buy GAP insurance from a company offering stand-alone GAP insurance policies, a bank/financial institution, or a specialised provider.

Is GAP insurance worth it?

Guaranteed Asset Protection (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 totaled. It is intended to cover the loss you would suffer if your loan balance is higher than the value of the vehicle.

GAP insurance is worth considering if you finance your vehicle and put less than 20% down, choose a longer loan term (e.g. 60 or 72 months), plan to put a lot of miles on your car, or purchase a vehicle that depreciates quickly. Generally, if you owe more than your car is worth, GAP insurance is a smart move. However, GAP insurance may not be worth it if your loan balance is lower than the value of your vehicle. Many drivers choose to drop GAP insurance once their loan balance drops below the car's value.

GAP insurance is also worth considering if you lease your vehicle. Doing so can help you avoid a potentially significant loss if your car is totaled and can also help you meet any lender or lessor insurance requirements.

The cost of GAP insurance varies depending on where you purchase it. Dealerships typically charge a flat rate of $400 to $700, while adding it to your comprehensive and collision coverage will generally only increase your annual premium by about $20, on average. If you arrange for a car loan through your bank or credit union, they may offer GAP insurance for as low as $200. It is important to compare prices and coverage before purchasing GAP insurance.

Frequently asked questions