Gap Insurance Defined: How It Works & Who Needs It

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Written by Mandy Sleight Edited by Nick Versaw

Updated October 17, 2023

Gap insurance — or “guaranteed asset protection” insurance — is an optional coverage many car insurance companies offer. It covers the difference between the amount your insurance company will pay if your vehicle is totaled and the amount you owe on your loan.

This guide explains how gap coverage works, what it costs, when and where to get it, and when it makes sense to drop gap insurance.

Key Takeaways:

• Gap insurance is best for drivers with a new car with a small down payment or who owe more than their car is worth.
• Although the car dealership may offer gap insurance, you can usually get it cheaper from your insurance company.
• You must carry comprehensive and collision insurance to add gap insurance to your policy.

How Gap Insurance Works

If you have an auto loan or lease your vehicle, gap insurance can protect you from having to pay the loan balance out of pocket if your insurance company totals it.

Let’s say your car’s “actual cash value” is currently $20,000, and you still owe $25,000 on your loan. If you get into an accident, and your car is a total loss, you’ll get a payout of $20,000 from your insurer, which will go to your lender. But you’ll still owe $5,000 on a vehicle you no longer have. With gap coverage, the insurance company pays the difference (minus your deductible).

The rules for adding gap coverage to your auto insurance policy depend on your insurance company. For example, The Hartford requires you to add gap insurance within 30 days of buying a used or new car. Nationwide will let you add it to a new or existing full-coverage policy. Travelers, on the other hand, only offers loan/lease gap coverage to original owners who financed or leased a new car from a dealership.

Gap insurance pros

• Gap insurance coverage provides protection if you can only afford to buy a new vehicle with a small down payment.
• It’s usually cheaper to buy gap insurance from an auto insurance company instead of the dealer.
• If your car is stolen or totaled, gap coverage will cover the remaining loan amount.

Gap insurance cons

• Gap coverage might not be worth it if you made a sizable down payment on your vehicle.
• Your insurance policy will only pay out if your vehicle is a covered total loss.
• You can only add gap coverage to your insurance policy if you have comprehensive and collision coverages.

How Much Does Gap Insurance Cost?

The cost of gap insurance depends on several factors, including:

• The type of car you drive
• Your vehicle’s age
• Your driving history

Let’s say you finance your vehicle for five years, and the annual cost of gap insurance coverage is $100. In this scenario, you’ll pay $500 over the life of the loan.

Using the earlier example, you’d owe $5,000 to the lender to pay your auto loan balance. But with gap insurance, you’d pay only your coverage deductible (typically between $250 and $1,000) and at most $500 in premiums.

Why You Might Need Gap Insurance

Gap insurance is optional, and not all drivers need it. In certain scenarios — like the ones we outline below — the extra cost of gap insurance is worth it.

You’re buying a new car

Most new cars depreciate by 20% within the first year of ownership, according to Triple-I.

If an accident damages your vehicle beyond repair or it gets stolen, the insurance company will pay the depreciated value of your car minus your deductible. And if you made a small down payment at purchase, you could owe more than the vehicle is worth. Gap insurance can help you pay off the car loan balance.

You’re leasing a vehicle

If you lease a car, the leasing agreement often includes a “gap waiver” as part of your monthly payment. A lease agreement is usually cheaper than financing a car, which can widen the financial gap between your vehicle’s value and what you owe. If your car is a total loss, the lease gap coverage will waive the remaining balance you owe.

You’re financing for more than 50 months

When you finance a car for a longer loan term, you pay more interest at the beginning of the loan than at the end. In this scenario, you can build negative equity, meaning your car’s actual cash value is less than the loan balance. A gap insurance policy can protect your finances since you won’t have to pay the difference if your car gets totaled before you pay it off.

You owe more on your car loan than it’s worth

Luxury vehicles and fast-depreciating models can cause you to be upside-down on your car loan well before you pay off your balance. If you don’t make a large down payment, banks may require you to buy gap insurance coverage to protect their investment. Even if they don’t, having gap coverage when you owe more than the car’s value could save you thousands if it gets totaled.

Where to Get Gap Insurance

Most insurers offer gap insurance, though you typically have to have comprehensive and collision coverages to include it in your policy. Coverage availability and additional requirements can vary by state and insurance company.

The following insurance companies may offer gap insurance in your state:

• Travelers
• Kemper
• Nationwide
• Clearcover
• Safeco
• Dairyland
• Elephant
• The Hartford
• Allstate
• The General
• Infinity
• Liberty Mutual
• Progressive

What Doesn’t Gap Insurance Cover?

Although gap insurance is valuable in certain situations, it doesn’t cover everything. Here’s what gap insurance doesn’t cover:

• Your collision or comprehensive coverage deductible
• The down payment on your vehicle
• Late payments and fees on your loan or lease
• Extended warranty coverage and costs
• Security deposits
• Prior lease or loan carry-over balances

Should You Buy Gap Insurance from the Dealer?

Your car dealership may offer optional insurance coverage similar to insurance companies’ gap insurance offerings. Lender costs can vary, and you might pay interest on the cost of gap insurance if the dealership builds it into your loan, which can make it much more expensive, according to the Consumer Financial Protection Bureau (CFPB).

Buying gap insurance from your insurance company has several benefits over buying from the car dealership:

• It’s usually cheaper.
• You can drop it whenever you want.
• You might get a discount.
• You don’t have to make an immediate decision (depending on the insurance company).

When Should You Cancel Gap Insurance?

Although gap insurance can be affordable, it doesn’t make sense to have it forever. You should cancel gap coverage once you pay your vehicle off or the actual cash value of the car is equal to or higher than the remaining loan payments.

Kelley Blue Book and NADA are two websites that will determine your vehicle’s value so you know when it’s time to cancel your gap insurance coverage.

Gap Insurance FAQs

Coverage options like gap insurance can provide a safety net for car owners with fast-depreciating vehicles or long loan terms. We answered the most common questions about buying gap insurance, how it works, and when it makes sense.

Is gap insurance a good idea?

Gap insurance is a good idea if you owe more on your vehicle than it’s worth. If you don’t have gap insurance and your insurance company totals it after an accident or it’s stolen, you could be financially responsible for the balance, even if you don’t own the car anymore.

How long does gap insurance last?

Gap insurance lasts until you cancel it or no longer qualify for coverage — typically if you no longer have a full-coverage insurance policy. However, you probably won’t need gap coverage for the life of your vehicle loan. Once your vehicle is worth more than what you owe, you can cancel the coverage.

What is a gap insurance dealer option?

A gap insurance dealer option is when a car dealership offers gap coverage as part of your loan or lease agreement. Although some lessors require gap coverage as part of the lease agreement, it’s usually optional with a vehicle loan. But if you include it in your auto loan, you might pay interest on the gap coverage as part of your payment plan.

What does gap insurance cover?

Gap insurance covers the difference between your car’s depreciated value and the amount you owe on it by paying off the balance of your lease or loan since you no longer have the car. But it only works if your vehicle is stolen or totaled by an insurance company.

Can I cancel gap insurance anytime?

You can cancel gap insurance anytime if you buy it through your insurance company. Canceling gap coverage might make sense if you owe less than your car’s worth or pay the vehicle off.

Sources

1. Consumer Financial Protection Bureau. “What is Guaranteed Auto Protection (GAP) insurance?” Accessed September 27, 2023.
2. Insurance Information Institute. “Insuring a leased car” Accessed September 27, 2023.
3. Insurance Information Institute. “What is gap insurance?” Accessed September 27, 2023.

Mandy Sleight Auto Insurance Writer

Mandy Sleight has over 15 years of insurance knowledge and expertise in auto, home, life, health, pet, supplemental benefits, and other insurance products. She is a sought-after insurance expert, appearing in Bankrate.com, Moneygeek.com, U.S. News & World Report, Reviews.com, CNET, and other publications. She uses her background and experience working for well-known insurance companies like State Farm and Nationwide Insurance to create engaging and easy-to-understand content to help readers make smarter insurance choices that have a positive effect on their budgets and finances.