Gap Insurance Guide

Gap insurance is a type of car insurance that covers the difference between a car's actual cash value and what you still owe on the loan or lease if your car is totaled in an accident or stolen. Gap insurance prevents you from being stuck paying for a vehicle you can no longer drive.

Without gap insurance, collision and comprehensive insurance can cover the vehicle's cash value, but if you still owe more than the car is worth, you'll need to pay the rest of the loan or lease on your own. Because of this, gap insurance is often required by lenders and lessors. 

Other Names for Gap Insurance

Guaranteed asset protection: Guaranteed asset protection is what the acronym GAP stands for, so you might see gap insurance referred to this way.

Loan/lease coverage: Some companies offer loan/lease payoff coverage in place of gap insurance. Loan/lease payoff generally has less strict eligibility requirements, but also provides less coverage than true gap insurance. Most loan/lease payoff policies will only cover a maximum of 25% of the car's cash value if it is totaled.

Gap insurance is pretty straightforward, but there are some decisions you'll have to make – most importantly, when to get it and which insurance companies are best for gap insurance.

When You Need Gap Insurance

You will probably need gap insurance if you lease your car or have a car loan. You are especially likely to need gap insurance if:

• You have a car that depreciates in value quickly, like a sports car or an electric vehicle.
• You made a low down payment (less than 20%, for example) on a large loan.
• You have a long-term loan (for example, a term that is 60 months or longer).
• You carried over negative equity from a past car loan into your current car loan.

Gap insurance can usually be purchased directly from a dealership, lender, or lessor for a one-time cost of about $400 to $700, but many traditional car insurance companies also offer gap insurance for just $20-$40 per year.

Best Gap Insurance Companies

• Travelers
• The Hartford
• Liberty Mutual
• Nationwide
• Kemper

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

Gap insurance is worth the money whenever you owe more on your car loan or lease than the car is worth. For example, if you paid a small down payment on your car, your loan term is 4-5 years or your car will depreciate quickly, you should consider getting gap insurance.

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.

You can get a gap insurance refund for unused premiums if you paid for coverage up front and then canceled it early. 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.

No, gap insurance is not the same as full coverage, but it can be part of full coverage. Full coverage is commonly defined as the combination of a state's minimum required insurance, comprehensive insurance, and collision insurance, though gap coverage is included if required by a lender or lessor.

Gap Insurance vs. Full Coverage

To learn more, check out WalletHub's guides on gap insurance and full coverage.

The most gap insurance will pay is the full amount left on your loan or lease balance. The exact amount gap insurance will pay depends on your vehicle's actual cash value, the remaining amount on your loan or lease,  and your insurance company.

As an example, let's say you purchase a car for $50,000 with a $10,000 down payment and, three years later, your car gets totaled. Your loan balance at the time is $25,000 and your car's cash value was $20,000 prior to being totaled. Your insurance company would cover your car's cash value ($20,000), as long as you have comprehensive or collision coverage. Then, gap insurance would pay the remaining $5,000 loan balance.

Some insurers offer loan/lease coverage, which is similar to gap insurance but doesn't cover the total amount remaining on your loan or lease. Loan/lease coverage can pay up to 25% of your vehicle's cash value toward your loan or lease balance, but the exact amount also varies by state.

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

Gap insurance costs around $3 per month when you add the coverage to your car insurance policy. When you purchase coverage from a car dealership instead, a gap insurance policy will cost a total of $400 to $700 in most cases.

A gap insurance policy covers the difference between what a leased or financed car is worth and how much the driver owes Like any other type of insurance, the cost of gap insurance varies depending on the car's value and the driver's risk characteristics, such as age and claims history.

How to Get Cheap Gap Insurance

Some car leases include gap insurance at no added cost. But besides this free coverage, buying gap insurance from your normal car insurance company is usually the cheapest option. On average, gap insurance will only add around 5% to 6% to your comprehensive and collision cost. But since gap insurance is a relatively uncommon kind of coverage, not every insurance company offers it.

If your insurer does not provide gap insurance, it's a good idea to compare quotes and see if it would be worth switching companies. If not, some companies offer standalone gap insurance policies. Also, if you are financing a car through a bank or credit union, these institutions will usually offer gap insurance upfront for anywhere from $200 to $700.

How Much Is Gap Insurance from a Dealer?

Dealerships are often the most expensive source of gap insurance, costing around $400 to $700 up front. If you are buying gap insurance that is rolled into your loan, bear in mind that you will be paying interest on the gap insurance premium as well as the rest of the loan's balance. As a result, you'll actually end up paying more than the original cost. This also comes into play wherever else you might get auto financing and gap insurance at the same time, including banks and credit unions.

However, price is not the only factor that should affect your decision of where to buy gap insurance. You should also consider how long your gap coverage will last and how long you will need it. Similarly, some gap insurance policies will pay your deductible, although many will not. And most gap insurance policies do not pay for anything you owe from a previous car loan.

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 to purchase gap insurance 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.

For more information, check out WalletHub's guide to the best gap insurance companies.

Gap insurance works by covering the difference between the balance on a car loan or lease and what the vehicle is actually worth if it is stolen or declared a total loss. For example, if you owe $24,000 on your loan and your car is worth only $20,000 when it's totaled, gap insurance would cover the $4,000 gap. Purchasing gap coverage ensures that you don't have to make loan or lease payments for a car that is no longer drivable. This type of insurance is optional, unless required by your lender or lessor.

In order to purchase gap coverage, a driver typically needs comprehensive and collision insurance, as well. Collision and comprehensive coverage will pay up to the car's actual cash value (ACV) if it's a total loss, and then gap insurance pays off whatever you still owe.

Example of How Gap Insurance Works

Imagine you buy a $50,000 car with a down payment of $10,000. One year 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, your insurance company will pay $20,000 (the car's actual cash value), 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, as you can see below. 

Other Key Things to Know About Gap Insurance

• Gap insurance can be purchased from dealerships, banks, credit unions and car insurance companies.

• The money received from your gap insurance policy will be paid directly to your lender or lessor, not to you or toward a new vehicle.

• Some gap insurance policies will cover your comprehensive or collision deductible.

• Gap insurance is not legally mandated in any state, but it can be required by lenders and lessors.

• If you sell your car, pay off your loan early, or trade your car in, you can receive a gap insurance refund.

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

Yes, you can buy gap insurance at any time before a car loan or lease is paid off but only from some gap insurance providers, as others will only sell coverage to the first owner of a car with a recent model year. The standalone gap insurance provider Gap Direct sells policies regardless of the car's age, for example. Gap Direct will cover a car as long as it has not already been declared a total loss.

On the other hand, gap insurance policies directly from dealerships or from major insurers like Allstate in coordination with a dealership usually need to be purchased at the same time as the car. Specific requirements vary by insurer, though, and it should be possible to find coverage for a car that you financed, leased, or refinanced during the past year or two.

In short, as long as you're willing to check with multiple insurers, you can get gap insurance after you buy a car.

It's also worth noting that you are unlikely to need gap insurance for a car that is more than a few years old, since gap insurance is designed to cover the difference between a car's actual cash value (ACV) and the balance on a loan or lease. Car depreciation slows after the first year of ownership, meaning that an older car likely does not have a large gap between its value and the balance on a loan or lease.

For more information, check out WalletHub's tips on whether gap insurance is worth it and where to buy gap insurance.

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.