What Is Gap Insurance & What Does It Cover?

luxury sedan on the road

Gap insurance can cover the gap between the actual value of your car and the amount you still owe on it. Also called “guaranteed auto protection” insurance, gap insurance is optional coverage that pays off your loan in case your car is totaled in an accident or stolen.

Sounds good — but is gap insurance really worth it? Compare.com breaks down gap insurance coverage and what it means to you.

Is Gap Insurance Worth It and What Does it Cover?

In many cases, yes — gap insurance is worth it.

You probably have heard stories about people getting into car accidents on the same day they pay off their loan. So aggravating! But listen: It’s way worse to crash your car when it’s brand new. That’s because you’ll be on the hook for the full, outstanding amount of your car loan —even if you no longer have a car to drive.

A vehicle begins to depreciate the second you drive it off the lot. Most cars lose 20 percent of their value within a year. Let’s say you purchase a new Jeep Wrangler for $28,000, with a down payment of $3,000. Six months later, you run off the road and total it. Your insurance company pays you for its depreciated value, minus your $500 deductible: $21,500. But you still owe $23,000.

If you don’t have gap insurance, you’ll have to pay your lender an extra $1,500 to satisfy the loan. Now you have no car and no money left for a down payment on a new one.

If you do have gap insurance, then it will pay the balance on the loan that remains after the insurance company has paid out for the value of the car. That’s a big financial burden lifted off you.

But the answer to the question, “Is gap insurance worth it?” isn’t the same for everyone. The Insurance Information Institute says you should only consider buying gap insurance if:

  • You made a down payment of less than 20 percent. If you paid 20 percent, then the depreciation gap may already be covered.
  • You’re financing your car for 60 months or longer. The longer the term, the longer you’ll owe more than the car is worth.
  • You’re leasing a vehicle, because the dealer will probably require gap insurance.
  • You bought a vehicle that depreciates quickly, such as an electric vehicle (because of the tax credit) or a luxury car like a BMW or a Mercedes.
  • You rolled over your old car loan into a new loan.

While Compare.com doesn’t offer a standalone gap insurance quote comparison, we can help you if you need gap insurance for your new car! First, compare quotes from multiple companies to find the best deal. When you’re ready to buy, ask that insurer about the cost of gap insurance.

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When Does Gap Insurance Not Pay?

If you don’t meet any of the criteria listed above, gap insurance probably isn’t worth it for you. And even if you did put down a small down payment or opt for a long loan term, you probably won’t need gap insurance for very long.

Check out this auto loan amortization calculator. (Yes, it’s just as much fun as it sounds.) Put in the amount of your loan, your loan term and the interest rate, and you get a neat little table showing exactly how much the amount you owe decreases each month. When your balance is equal to, or less than, 80% of the vehicle’s original price, then you’re good to drop your gap insurance.

Wondering how? It’s pretty easy! Here’s our quick and easy guide to canceling your gap insurance.

How Much Does Gap Insurance Cost?

If you’re trying to figure out if gap insurance is worth it, a major factor is the cost. Gap insurance coverage rates depend on two things: the value of your car, and where you buy your insurance.

The easiest way to get gap insurance is to buy it from the dealer when you purchase your new vehicle. However, it’s going to be expensive: the dealer will probably charge you a lump sum of $500 to $1,000.

You’ll get a much better deal from your auto insurance company. Typically, the cost of gap insurance from an auto insurer is around 5 percent of your regular collision and comprehensive premium. If your C&C premium is $700 per year, then you’d pay $35 for a full year of gap insurance. If your lease contract does not require you to purchase a specific gap insurance policy, you should shop around to get the best price.

Insurance Companies That Offer Gap Insurance

Not every insurer sells this coverage, but many do. Here’s a list of several insurance companies that offer gap insurance.

  • Allstate offers gap insurance.
  • Amica Mutual Insurance has gap insurance.
  • Encompass Insurance has both loan/lease gap coverage and new-car replacement coverage.
  • Kemper Auto Insurance has gap insurance as well as Kemper Total protection, which pays you the amount necessary to repair the vehicle or pay you the amount necessary to buy a new vehicle, whichever is less.
  • Liberty Mutual has an innovative alternative to gap insurance: Better Car Replacement coverage. If your car is totaled, Liberty Mutual will give you the money for a replacement car that is one model year newer with 15,000 fewer miles than your current car.
  • Nationwide makes gap insurance available to its customers.

Read the Gap Insurance Policy’s Fine Print

One last thing: Before you buy a gap insurance policy, take a close look at what it covers! Some people think gap insurance can cover all kinds of money mishaps, like missing a car payment. Gap insurance coverage does not pay for:

  • Repairs to a new car
  • Medical bills after an accident
  • Missed or overdue lease or loan payments
  • Carry-over balances
  • The balance of the loan if your car is repossessed
  • Extended warranties
  • Lease fees or penalties

The best way to save money on gap insurance? Compare auto insurance quotes on Compare.com. In just a few minutes, you can see personalized, unbiased quotes from multiple insurance companies. Pick the best deal, click to buy, and add any coverage you want — like gap coverage.

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