When Does Gap Insurance Not Pay? Is it Right for You?

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When does gap insurance not pay: woman happily driving a car

Despite the excitement of purchasing or leasing a new vehicle, accidents and totaled cars are all too common. Furthermore, according to the Insurance Information Institute, 810,400 vehicles were stolen in the United States in 2020 alone. To protect your new asset from these harsh realities, you may think it’s wise to add gap insurance to your car insurance policy.

However, it’s important to understand what exactly gap insurance covers. When is it worth the coverage, and when does gap insurance not pay

Not all vehicle owners are good candidates, so we’re here to help you decide! Keep reading to see if the option is right for you and how to get the most out of your gap insurance coverage.

If you want to bundle gap insurance into your current auto insurance policy, we recommend comparing quotes from multiple car insurance providers. To get started, enter your ZIP code below.

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What is Gap Insurance?

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Short for Guaranteed Asset Protection or Guaranteed Auto Protection, gap insurance protects car owners from owing money on a depreciated vehicle or total loss not covered by their standard auto insurance policy. It protects owners by reimbursing the difference between their vehicle’s current value and the amount owed on their used or new vehicle.

Say you’re financing $38,000 for a new Genesis G70. After 36 months, the value of the car has depreciated to $25,500, but you continue to owe $30,000 on your loan, creating a $4,500 “gap.” With a $500 deductible, an insurance policy with no gap coverage will pay $25,000 (vehicle’s value minus deductible). With gap coverage, you are covered for the full outstanding balance minus deductible ($29,500), covering the $4,500 difference.

Without gap insurance, your auto insurance will only pay the amount your vehicle is worth at the time it’s stolen or written off, not the loan amount owed.

Note: Most gap insurance policies available through auto insurers are offered as a standalone policy, not bundled with the overall policy. Expect to pay a one-time fee of $200-$300 for a standalone gap insurance policy.

How Does Gap Insurance Work?

Let’s explain gap insurance using a leasing and purchasing scenario.

Purchasing a Vehicle

Say you purchased a 2017 Toyota Camry SE valued at $18,000. You owe $24,000 on the vehicle. Suppose your Camry is stolen or written off today. In that case, your collision coverage will offer a payout up to your vehicle’s depreciated value ($18,000), forcing you to pay $6,000 out of pocket to cover the rest. With gap insurance, the $6,000 is covered by the insurance payment, averting disaster.

Note: Gap insurance reimbursements go directly to the finance company, not you.

Leasing a Vehicle

Suppose you lease an Audi A4 and pay a $5,000 capitalized cost reduction at lease start. Your leased car is stolen with a $12,000 lease payoff. At the time of the theft, the insured value of your vehicle was $10,000. With a $1,000 insurance deductible and no other policy deductions, the gap amount is $2,000 (the difference between the current lease payoff and your vehicle’s insured value). In this case, your gap insurance provider will cover the $2,000. You would only be responsible for paying the $1,000 insurance deductible directly to the lessor to end your lease early.

What is Your Vehicle’s Actual Cash Value?

Your car’s actual cash value (ACV) is the value of your car minus depreciation. For example, if your vehicle cost $43,200 when you purchased it and has depreciated by 25%, the actual cash value is $32,400.

When is Gap Insurance Worth the Coverage?

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There are several scenarios where it’s generally a good idea to purchase gap insurance:

  • A loan with at least a 36-month repayment term: Taking out an auto loan longer than 36 months increases the risk that your car’s ACV will be less than the amount owed on your auto loan.
  • Leasing your vehicle: If your leased vehicle is stolen or written off and you don’t have gap insurance, your leasing company will force you to repay the remaining balance owed on your car. There may be a large gap between what your auto insurer will pay and your leased vehicle’s replacement cost, creating the need for gap coverage to fill the void.
  • A vehicle with high depreciation: Over time, new cars or used cars with high depreciation rates are more likely to be valued less than the amount owed on your car loan balance (negative equity).

In short, all of these scenarios cover instances where your car’s ACV is more likely to be lower than the amount owed on your auto loan, making gap insurance worth it.

When Is Gap Insurance Not Worth the Coverage?

If you want to know when does gap insurance not pay, we recommend not purchasing the coverage if you meet any of the following criteria:

  • A loan with fast repayment: If your auto loan has a repayment term of less than 36 months, the risk of the value of your car (ACV) being less than the amount owed on your auto loan is smaller. However, exceptions exist, such as your car’s high depreciation rate.
  • A vehicle with low depreciation: Cars with low depreciation rates are more likely to be valued higher than the amount owed on your auto loan. This eliminates the gap, resulting in no out-of-pocket expenses for policyholders if your vehicle is written off or stolen.
  • A down payment of at least 20% on your vehicle: If the down payment on a new or used car is less than 20%, it creates a larger gap between what you owe on your car and its actual replacement value.

How Do I Find Gap Insurance?

Gap insurance generally comes from dealerships/finance companies or auto insurance companies. We recommend going with auto insurance companies, which typically charge lower rates (as little as $20 additional on your annual premium versus a one-time, flat fee of $400-$700 added to the loan by car dealerships). We highly recommend two car insurance companies, Liberty Mutual and Nationwide, offering add-on gap insurance to your policy.

Can I Cancel Gap Insurance?

Yes, you can cancel gap insurance at any time. If you’re upside down on your auto loan and it’s worth more than you owe, it’s a good time to cancel. Be aware of any termination fees that may apply. Include reviewing cancellation fees when you shop rates from multiple gap insurance providers using Compare.com.

When Does Gap Insurance Not Pay?

In addition to the situations where gap insurance is not needed, there are several exclusions with gap insurance policies:

  • Rental car reimbursement
  • Excess wear and tear
  • Late monthly payment penalties
  • High mileage penalties
  • Vehicle repairs after an insurance claim
  • Deferment of car payments due to financial hardship
  • Security deposits
  • Extended warranties applied to your loan
  • Modifications to your vehicles (e.g., spoilers)

Shop Around for the Best Car Insurance Rates

Understanding when gap coverage makes sense and when it doesn’t will help you explore all of your options. Find the cheapest car insurance with the best options for gap insurance — if you need it — by shopping around for the best rates on Compare.com.

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