Gap Insurance Guide

Gap insurance pays the difference between the balance of a lease or loan on a car and what the vehicle is actually worth if it is declared a total loss. Gap insurance, which stands for guaranteed asset protection, pays off the remaining balance owed so that you don't have to make payments on a car that is no longer drivable.

Gap coverage usually only applies when a driver has comprehensive and collision insurance. Collision or comprehensive coverage will pay out the car's value if it's a total loss, and then gap insurance fills in the rest.

Gap Insurance Example

Imagine you buy a $50,000 car with a down payment of $10,000. Three years later, the car is worth $20,000, but you still owe $24,000 on the loan. If the car is totaled in an accident or stolen and declared a total loss, your normal insurance policy will pay $20,000, or the car's actual cash value (ACV), minus your deductible.

If you don't have gap insurance, you'll still owe $4,000, and you'll still have to pay off the car even though you can't drive it. But if you do have gap insurance, it will pay the $4,000. Some gap insurance policies even pay your deductible, though most do not.

It's also important to keep in mind that the money you receive from gap insurance will go to your lender or lessor, not toward your purchase of a new car. If you're interested in coverage that will help you buy a car in the future, look into new car replacement insurance instead.

Finally, you can buy gap insurance from a dealership, bank, credit union, or car insurance company. It's not legally mandated in any state, though car dealerships will sometimes require it on a leased or financed vehicle. If you sell a car, pay it off early, or trade it in, you can usually receive a gap insurance refund.

Gap insurance covers the difference, or “gap,” between the actual cash value of a totaled car and the remaining balance on your loan or lease. That means gap insurance helps you pay off your loan or lease if your financed vehicle is totaled and you are left owing more than what your car is worth.

What Gap Insurance Pays for If Your Car Is Totaled

• Your remaining loan balance
• Any amount owed on a lease
• Negative equity from a previous vehicle that was rolled into your current loan

It's important to note that gap insurance only pays when your car is totaled, so you cannot file a gap claim if you simply can't make your loan or lease payments. Additionally, most gap insurance policies will not pay your collision or comprehensive deductible, if applicable.

What Loan/Lease Payoff Insurance Covers

Not all insurance companies offer gap insurance, but some offer loan/lease payoff insurance as an alternative. Loan/lease coverage is similar to gap insurance, except that it usually only pays up to 25% of the vehicle's actual cash value toward the policyholder's loan or lease balance, which might not be enough to cover the full amount owed.

If you're curious about gap insurance or loan/lease coverage, you should check with your insurance company to see if they offer either. 

To learn more, check out WalletHub's guide to gap insurance.

You can buy gap insurance from most major insurance companies, including Progressive, Nationwide, State Farm, and Allstate. Another place where you might be able to purchase gap insurance is through your car dealership.

However, if you buy gap insurance from a dealership, you might end up paying extra because the cost is added to your principal, which is then used to calculate your interest. So, you might save money by asking your insurance company to add gap insurance to your policy.

If you already have car insurance, the easiest way to buy gap insurance coverage is to contact your existing insurance provider and ask about adding it to your policy. If you do not have car insurance, compare quotes from major insurance companies that offer gap insurance. You can find the best options from WalletHub's guide listed below.

Where To Buy Gap Insurance

• AAA
• Allstate
• American Family
• Esurance
• Liberty Mutual
• Nationwide
• Progressive
• Safeco
• State Farm (only for State Farm Bank customers)
• Travelers

You can also buy gap insurance from the bank or credit union financing your car. However, like car dealers, other lenders usually calculate the cost of gap insurance as one upfront payment, then add the sum to your loan amount. As a result, it's best to avoid this type of gap insurance to keep from paying interest on your premium. 

Why You Should Consider Buying Gap Insurance

Gap insurance provides protection on a car you lease or buy with a loan. In the event of an accident in which your car is totaled, the value of your car would drop below the money you owe on the lease or loan. Standard insurance policies would pay only the value of the car post-accident. Gap insurance would ensure that you can pay back the full amount you owe. That is why auto lenders typically require it.

Gap insurance is worth it if you paid a small down payment on your car, your loan term is 4-5 years, or your car will depreciate quickly. Gap insurance is never mandated by state law, and few lenders or lessors require it, so the decision to buy it depends on personal circumstances.

Gap Insurance Is Worth It When:

• You don't have the savings to pay off your loan or lease if the car is totaled or stolen.
• Your down payment is less than 20% of the car's value.
• Your loan will last four years or more.
• You drive more miles than average, which reduces the car's value faster.
• Your car is a make and model that depreciates especially fast, like a luxury sedan or electric vehicle.
• You are a single-car household and need a car to get around.
• Your loan includes negative equity from your last car.

Since gap insurance covers the difference between the car's actual cash value and the amount you owe, researching these two numbers will be a key deciding factor in whether gap insurance is worth it.

Why Getting Gap Insurance Is Worth It

For example, say you buy a car for $20,000 and your down payment is $2,000. This small down payment suggests that gap insurance might be worth it, but it's still a good idea to check the car's anticipated value after a year to determine if there will be a gap. If the car is worth $12,000 after a year but you'll still owe $15,000, gap insurance could be a smart investment. If you don't buy gap insurance and this car is totaled after a year, you'll still owe $3,000 even though you can no longer drive it.

On the other hand, if your down payment is large enough or the car's resale value is high enough that you'll never owe more than the car is worth, gap insurance is unnecessary. Similarly, if you do owe more than the car is worth but you have the resources to pay the difference if the worst happens, it might be worth taking the risk.

Gap insurance takes 5-45 days to pay the policyholder after a claim is filed. For drivers to receive a gap insurance payout, the car first needs to be declared a total loss, and the insurance company needs to accept the claim.

State laws also dictate how long an insurance company has to pay for a claim. For example, insurers in Texas must pay within five days after accepting a claim. Some other states, like Massachusetts, do not have a specific limit, saying only that an insurer must pay within a “reasonable” amount of time.

Factors That Affect How Long it Takes for Gap Insurance to Pay

Insurance companies will generally declare a car a total loss within 30 days of the initial claim being filed. However, more complicated situations take longer to settle, such as:

• Accidents involving multiple drivers
• Medical bills
• Unclear fault determination

Once the car has been officially established as a total loss and the insurer agrees to pay for gap coverage, the company will begin to process the gap payment. Since gap insurance pays for the difference between a car's actual cash value (ACV) and the balance on its loan or lease, gap insurance payments are usually sent straight to the lessor or lender.

How To Speed Up Gap Insurance Payout

To get the fastest possible gap insurance payout, be sure to check your policy details and follow any instructions from your insurance company. For example, some insurers require you to keep making payments to your lender or lessor while the claim is being investigated.

Also make sure to send the insurance company any necessary documents, like a copy of the police report, and promptly sign and return all paperwork. And if needed, check your state's laws to see if there's a specific window during which your gap insurer is required to pay.

No, Geico does not offer gap insurance. Unlike seven of the top 10 car insurance companies, Geico does not sell gap insurance, a specialty type of coverage that pays for the difference between a totaled car's value and the driver's loan or lease balance.

You have several options if you're a current Geico customer and are looking for gap insurance. You could switch insurers and purchase a policy from a company that does offer gap insurance (or loan/lease payoff coverage, which is similar), like Nationwide or Progressive. You could also maintain your policy with Geico and purchase gap insurance from a dealership or a stand-alone company. However, it's worth noting that dealership gap insurance is often the most expensive option, since it's usually rolled into your loan and charged interest.

For more information, check out WalletHub's complete guide to gap insurance.

To get a gap insurance refund, contact the insurance provider and give them the policy number and documents showing that the car was traded in, sold, or paid off early. Gap insurance refunds are usually only possible for policies that were paid in full up front. Drivers cannot get refunds simply because they never filed a gap insurance claim.

If you are cancelling within 30 days after the policy's start date, you might be able to get a full refund, minus any cancellation fees. In other cases, only a partial refund may be possible. The details will depend on your policy and your state's laws.

When You Can Get a Gap Insurance Refund           

• You are paying off, selling, or trading in the covered car.
• You are switching to a different gap insurance company.
• Your loan balance is no longer more than the car's actual value, though it's best to leave a cushion of $1,000-$2,000.

If you need a gap insurance refund because you're selling or trading in the car, be sure to wait until the car no longer legally belongs to you before canceling your gap insurance. Then, you will need to give the appropriate paperwork to your insurance provider, such as proof of sale or auto payoff letter.

Some gap insurance companies might also require an odometer verification showing the mileage on your car, which you can get from a dealership before you sell or trade in the vehicle.

Similarly, if you're refinancing, wait to cancel your gap insurance until your previous loan is no longer in effect.

When You Cannot Get a Gap Insurance Refund

On the other hand, drivers cannot get a gap insurance refund if the insured car is declared a total loss before the policy's expiration date. In this case, the gap insurance will pay for the difference between the car's value and the loan balance, but drivers will not be eligible for a refund for the remaining months of coverage.

How Long Does It Take to Get a Gap Insurance Refund?

Gap insurance refunds usually take 4-6 weeks. Staying in contact with your gap insurance provider and promptly returning signed paperwork can expedite the process, though.

Gap insurance lasts for the length of the loan or lease when purchased from a dealership, and it lasts for as long as it remains on the policy when purchased from a standard car insurance company. Gap insurance is usually only needed for one to two years, since it's useless when a car is worth more than the loan/lease balance.

Gap insurance pays for the difference between a car's loan or lease balance and its actual cash value if it is declared a total loss. Since new cars depreciate quickly, gap insurance can keep drivers from needing to make payments on a car that is no longer drivable. But depreciation slows down over time, so the gap between car value and loan/lease balance eventually disappears as the driver pays off the car.

As a result, you should keep an eye on the amount you owe and also estimate the car's value using online tools like Kelley Blue Book. In general, it makes sense to cancel gap insurance coverage once your loan or lease balance is $1,000-$2,000 less than the car is worth.

Yes, Progressive offers gap insurance for about $5 per month, on average. If your car is totaled, Progressive's gap insurance, also called loan/lease payoff coverage, covers the difference between your loan balance and what your car is worth, minus your deductible. Progressive gap insurance will pay as much as 25% more than your car's depreciated value.

Let's say you finance $30,000 for a new car, which is now worth $20,000. You total your car and find that you still owe $25,000 on the loan. Full coverage only pays up to your car's depreciated value—$20,000. That leaves you with a $5,000 difference. If you carry gap insurance, Progressive will pay the complete $25,000 balance, minus your deductible (usually $500 or $1,000).

You might consider Progressive gap insurance if there is a significant difference between your car's actual cash value and what you owe on a loan used to get it. In particular, if you just bought a new car (especially with a low down payment) or are financing a vehicle for more than 48 months, you might want gap insurance. You must carry comprehensive and collision coverage to add gap insurance to a Progressive policy.

No, State Farm does not offer gap insurance. Although State Farm doesn't have a traditional gap insurance option, it does offer something comparable to gap insurance with its Payoff Protector^® benefit, which is included with every vehicle financed by State Farm Bank, or used as collateral on a State Farm loan.

How State Farm's Equivalent to Gap Insurance Works

Like gap insurance, State Farm's Payoff Protector benefit covers the outstanding principal balance on a State Farm auto loan after the car is totaled or stolen and the primary insurance provider pays its share.

Once a customer's collision or comprehensive insurance provider (it doesn't have to be State Farm), or another driver's liability insurance, makes its payment, Payoff Protector will pay the rest owed to State Farm Bank. The loan must be in good standing for the Payoff Protector benefit to apply.

Who Can Get State Farm Gap Insurance

State Farm's Payoff Protector benefit isn't an insurance product that can be purchased by customers without a loan contract from State Farm Bank. It also has different rules and restrictions depending on where a customer lives. For more information about State Farm Bank's Payoff Protector benefit, call the company directly at 877-SF4-BANK (877-734-2265).