If you total a new car that you’ve leased or financed with a loan, a basic auto insurance policy might only pay out the actual cash value of your car, which may not be enough to pay off the remainder of your loan or lease.
But gap insurance, sometimes short for “guaranteed auto protection,” will cover the gap between your car’s actual cash value after depreciation and the money you still owe in lease or loan payments. Your auto lender or lessor may require you to add gap insurance to your policy, in addition to collision coverage and comprehensive coverage, to ensure you’ll be able to pay for the vehicle even if it’s totaled before the lease or loan ends.
It could take anywhere between five and 45 days for your auto insurer to pay out gap insurance after a claim. The exact amount of time varies based on the complexity of your claim and the regulations in your state. Typically, these payments are sent straight from your insurance company to your lienholder or lessor.
What is gap insurance?
When you total a car, comprehensive and collision insurance will pay you the actual cash value, or ACV of the car, but the ACV takes depreciation into account. The more a car is driven, the less it is worth, so at the time of an accident, your car’s ACV may not be enough to pay off the rest of a lease or loan.
If the ACV is less than the amount you still owe on your lease or loan, you’ll continue to owe your lienholder or lessor for the car, even though it isn’t in drivable condition. Gap insurance will pay off the difference between your car’s ACV and the amount left on your lease or loan, and the payment will generally go to your lessor or lienholder directly.
Let’s say you financed your car for $20,000, then you totaled it a year later in a covered collision. Your car will have already depreciated in value because of normal usage, so your car insurance company may only pay out, say, $14,000. But since you’re only a year into your two or three year term, you also still have payments left to make on the car. If the amount of money you still owe on the car is greater than the $14,000 that your car is currently worth, gap insurance would cover that difference, letting you complete the remaining payments and leaving you free to lease or buy a new vehicle.
How long does it take for gap insurance to pay?
Most insurers will process a payment within 30 to 45 days of a claim being filed. Remember that gap insurance can only pay out after the rest of the claim is settled, because it fills in the gap between what you received for the damage and what you still owe on your loan or lease.
In some states, insurers can also take as long as a month to agree to cover the damages. Others have different rules: Texas, for example, requires payments to be made within five days after an insurer agrees to pay for the claim. This means that the actual time frame for gap insurance to pay out will vary based on state regulations and the complexity of the claim.
Most insurers will let you check up on the status of a claim after you’ve filed it, so you should be able to track what stage your claim is in. You’ll also have a claims adjuster, or representative, who you can contact with questions about the status of your claim.
Where does the gap insurance pay out go?
In general, car insurance claims settlements can go to you or directly to a repair shop that is fixing your car after a covered incident. With gap insurance, since the point of the coverage is to pay off the remainder of the lease or loan, the payment would go straight to the lessor or lienholder, paying off the rest of the cost and leaving you free to finance or lease another car.
How do I know if I have gap insurance?
You can find out if you have gap insurance by checking your declarations page which lists the coverage included in your policy. You may be able to access both documents online or confirm your coverage information by calling your insurance provider directly.
Where to buy gap insurance
Most major insurers offer gap insurance as coverage you can choose to add when you buy your policy. If you don't have it already and you finance or lease a new car, you can add gap insurance on to your policy when you update it.
You can make additions to your policy and coverage amounts, as well as add additional drivers or new vehicles to your policy by contacting your insurance company over the phone or online. Many major insurance companies also have an app, allowing you to access and modify your policy at any time.
Other car insurance coverage for loaned and leased cars
Almost every U.S. states require you to have a minimum amount of car insurance, specifically liability coverage, which pays for injuries and property damage you cause with your vehicle. However, your state’s requirements are just a starting place, and your lienholder or lessor will likely require you to have more than your state’s minimum amount of required car insurance.
In addition to gap and liability insurance, your lienholder or lessor may also require you to add comprehensive and collision coverage to your policy. Comprehensive coverage protects your vehicle if it’s damaged in a non-driving peril such as extreme weather, theft, or a fallen object. Collision coverage, often paired with comp, offers financial protection after your car collides with another vehicle, person, or object, no matter who was at fault.
Both comp and collision coverage protect your car itself, and can pay for the costs to repair severe damage but only up to your car’s ACV if it gets totaled. Gap insurance can cover your remaining payments on the car and the depreciation gap between both amounts, making it important coverage to add when you finance or lease a vehicle.
New car replacement vs. gap insurance
Gap insurance pays off the remainder of the loan or lease, so you can't use that money on a new car. You can buy a new car of the same make and model, however, with new car replacement coverage, another optional add-on that will pay out more than the ACV of your totaled vehicle.
The big difference to note between gap insurance and new car replacement coverage is that gap insurance pays your lessor or lienholder the difference between the ACV and what you still owe in payments. New car replacement pays you the difference between the ACV and what it would cost to replace your totaled car with one of a similar make and model, so that you can go out and buy a brand new car to replace your totaled one.
New car replacement coverage is only available for cars that are one- or two-years-old, so you’ll want to add it to your policy as soon as you lease or finance a new vehicle. Some insurers sell it in combination with gap insurance, but the cost of new car replacement coverage varies by insurer.