Gap insurance is a valuable add-on for drivers who have a loan or a lease on their car; it can stop you from being “upside down” on your loan after an accident and — depending on where you buy your gap coverage — it may only raise your car insurance rates by a few dollars a month.
Gap coverage pays off the rest of your loan or lease if your car is totaled and the payout wasn’t enough to fully pay off what you owe. If you have a lease or loan, you may be required to have gap insurance, but drivers who own their cars outright don’t need gap insurance.
How does gap insurance work?
The value of a new car goes down immediately after you drive it off the lot. This means that, if your car is totaled or stolen, the value of your car (and the amount you get paid by your insurance company) will be less than you paid for it, sometimes referred to as “negative equity.”
Let’s say you bought a new car for $30,000, including taxes and fees, and you put $1,000 down. About a year later, you get in an accident and your car is totaled. You file a claim through your insurance and find out your car is valued at $22,000, its depreciated value at the time of the loss.
Meanwhile, you owe $25,000 after a year’s worth of payments, which leaves you with a $3,000 "gap" that you still owe your lender.
If you have gap insurance, you’ll receive a payout from the car insurance company for that remaining $3,000 in addition to the $22,000 it owes you, which would be paid out directly to your lender.
Without gap insurance, drivers who took out a loan or a lease for their new car could still owe money on a car that is unrepairable, and may need to pay off thousands of dollars for a car they aren’t driving anymore.
What does gap insurance cover?
Gap insurance only covers one thing: the difference between how much you owe on your vehicle and how much you get paid by the insurance company if your car is a total loss.
Gap insurance is only available as part of a full coverage policy for drivers who have collision and comprehensive coverage, but it is a separate type of coverage that doesn’t pay for any damage to your car or anyone else’s vehicle. It only kicks in in the event that your leased or financed car was totaled and you still owe money on the lease or loan.
Do I need gap insurance?
Gap insurance is often required by a lender or finance company when you take out a loan or a lease for a vehicle, so you may need gap insurance if it is required as part of your loan.
An easy way to know if you need gap insurance is if::
It is required by your lessor or lender
You owe more on your auto loan than your car is worth
You paid a low down payment toward your loan
You have long-term financing
You won’t be able to pay the “gap” out of pocket
You put a lot of wear and tear on your car
Your car make and model depreciates faster than others
Even if your lender doesn’t require gap insurance, gap insurance may still be a good idea. If you couldn’t afford to keep making payments on your loan if your vehicle was totaled, gap insurance could help protect you financially after an accident.
Remember, if you don’t have a loan or a lease on your vehicle, you don’t need to buy gap insurance.
Is gap insurance worth it?
Yes, if you are leasing or financing your vehicle, gap insurance is probably worth it. If your car is stolen or totaled in an accident, your insurance company will write you a check for the actual cash value (ACV) of your vehicle, minus your deductible.
That actual cash value payment may not be enough to pay off your car loan or lease. Having gap insurance prevents you from being forced to make payments on a car that has been declared a total loss.
How much does gap insurance cost?
Gap insurance prices vary, but if you add gap coverage to your car insurance policy, it may add less than $50 per year. With some insurance companies, adding gap insurance may change your rates by as little as $3 a month.
But gap insurance is much more expensive if you go through the car dealership or your lender. Most dealerships charge a flat rate for gap insurance, with prices set at $500 or more per year.
The price difference for gap insurance between insurers and car dealerships is so high that it can be worth comparing quotes for new policies if your current insurance company doesn’t offer it.
How to buy gap insurance
You get gap insurance the same way you get any other type of insurance coverage or endorsement. You can either:
Add it to your policy when you’re buying car insurance. While you’re shopping for insurance coverage, you’ll choose the types of amounts of coverage you want.
Choose it when you add a new car to your policy. Not all cars on the same policy need to have the same coverage, if you finance a brand new car and add it to your existing policy, you can add gap coverage for that car even if you don’t already have it in your policy.
Unlike most other kinds of car insurance coverage, you can get gap insurance from a dealership or lender — but this is usually a lot more expensive than getting it through your car insurance.
If your current insurance company doesn’t offer gap insurance and you need it, you can use an online marketplace like Policygenius to compare quotes from multiple companies that do offer it to make sure you are getting the best price on the coverage you need.
Car insurance companies that offer gap insurance
Even though gap insurance is required for some drivers, not every car insurance company offers it. In fact some of the largest auto insurance companies in the U.S., like GEICO and Farmers, don’t have gap insurance.
If you’re looking for car insurance companies that have gap insurance, the chart below shows the gap insurance coverage available through top insurance companies:
Yes, for up to 25% of the car's value
Not offered through insurance, people who finance their car through State Farm's bank can get a similar coverage
Offers an equivalent product called Guaranteed Asset Protection, it’s not a type of insurance
Yes, offered as gap coverage
Yes, you’ll see it on your policy as loan/lease coverage
Yes, but it comes with a deductible
Yes, as long as you have both comprehensive and collision coverage
Yes, offered as gap coverage
Offers an alternative product called Total Loss Protection