What is gap insurance and how does it work?

Gap insurance is an optional coverage that helps pay off your car loan or lease if your car is stolen or totaled.

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Rachael Brennan

Rachael Brennan

Senior Editor & Licensed Auto Insurance Expert

Rachael Brennan is a senior editor and a licensed auto insurance expert at Policygenius. Her work has also been featured in MoneyGeek, Clearsurance, Adweek, Boston Globe, The Ladders, and AutoInsurance.com.

Updated|5 min read

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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.

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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.

Key takeaways

  • Gap insurance pays the difference between how much you still owe on your vehicle and how much you actually get paid by the insurance company when your car is a total loss.

  • Drivers who took out a loan or a lease for their new car could still owe money on a car they don’t have anymore if they don’t buy gap insurance.

  • Gap insurance is usually required by your lender or finance company when you take out a car loan or lease a new vehicle.

  • If your insurance company doesn’t offer it, you can probably get  gap coverage directly through the car dealership or your lender.

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.

→ Read more about what insurance you need for a leased car

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.

→ Read more about full coverage car insurance

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.

→ Read more about when your car is 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.

→ Learn more about how much car insurance costs

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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:

  1. 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.

  2. 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:

Company

Gap insurance

Progressive

Yes, for up to 25% of the car's value

State Farm

Not offered through insurance, people who finance their car through State Farm's bank can get a similar coverage

Allstate

Offers an equivalent product called Guaranteed Asset Protection, it’s not a type of insurance

American Family

Yes, offered as gap coverage

Amica

Yes, you’ll see it on your policy as loan/lease coverage

Nationwide

Yes, but it comes with a deductible

AAA

Yes, as long as you have both comprehensive and collision coverage

Liberty Mutual

Yes, offered as gap coverage

USAA

Offers an alternative product called Total Loss Protection

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We don't sell your information to third parties.

Frequently asked questions

How long does gap insurance last?

If you buy gap insurance as part of your auto insurance policy you can cancel it at any time, but buying gap insurance through your lender or another source may mean that you are paying for gap insurance until your loan is completely paid off.

What is vehicle depreciation?

Depreciation is when the value of your vehicle goes down over time. Sometimes depreciation happens quickly, like when you drive a new car off the lot or if your vehicle is in an accident, but it also happens over time, the same way your TV or your toaster oven aren’t worth as much as a newer model.

Is gap insurance the same as full coverage?

No, gap insurance is not the same as full coverage. But gap insurance can be sold as part of a full coverage policy (along with comprehensive and collision insurance) for drivers who are leasing or financing their vehicle.

What does gap insurance not cover?

Gap insurance doesn’t cover damage you cause to other people or their property (that’s your liability insurance) or damage to your own vehicle (that’s your comprehensive and collision coverage.) Gap insurance only covers the difference between what you owe to your lender and the value of your vehicle when it is totaled.

Author

Senior Editor & Licensed Auto Insurance Expert

Rachael Brennan

Senior Editor & Licensed Auto Insurance Expert

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Rachael Brennan is a senior editor and a licensed auto insurance expert at Policygenius. Her work has also been featured in MoneyGeek, Clearsurance, Adweek, Boston Globe, The Ladders, and AutoInsurance.com.

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