Gap Insurance

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 and your gap insurance provider doesn't exclude previous cars' loan balances from coverage.

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.

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 works by paying the difference between what a driver owes on a leased or financed car and what the vehicle is actually worth if it is declared a total loss. Gap insurance, which stands for guaranteed asset (or auto) protection, pays off the remaining balance owed so that a driver does not 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.

What Does Gap Insurance Cover?

Gap insurance ultimately covers depreciation, which is important because new cars quickly lose their value. Cars have different resale values, so depreciation varies by vehicle. But on average, a car loses about 11% of its value on the first day alone, and about 20% - 30% of its value within the first year.

A car's depreciation rate, as well as the loan/lease balance and interest rate, will affect the gap between how much a driver owes on the car and the amount the car is actually worth. When there's a difference between these two numbers, gap insurance covers that difference. Owing more than the car is worth is called being “underwater” or “upside down” on your loan.

For example, say 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.

What Gap Insurance Does Not Cover

• Medical bills for you or another driver
• Damage to another driver's property
• The cost of repairing or replacing your vehicle
• Car payments missed due to personal circumstances like an injury or job loss
• Reduced value after an accident that does not total the car
• Engine failure or a mechanical problem

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.

To find out if you have gap insurance, you should check both your existing car insurance policy and the terms of your loan or lease. Drivers can get gap insurance through their insurance company as an add on or separately through their auto lender, so it's important for drivers to check both places.

Gap insurance, which covers the difference between your loan balance and the car's actual value, can come from a dealership, bank, credit union, or car insurance company. It's unlikely that you bought a stand-alone gap insurance policy without realizing it, so your first step should be to check with the obvious candidates.

How To Know If You Have Gap Insurance

1. Check with your car insurance company.

You can look through records such as your recent bills, or you can login to your account on the company's website. If this fails, you should call to ask about your coverage.

2. Check with your auto lender.

If you didn't buy gap insurance from your normal insurance company, you could have purchased it from the dealership, bank, or credit union that supplied you with a loan or lease. It can be easy to overlook gap insurance from one of these sources, since it's sometimes included in your contract automatically. Again, your contract and any itemized receipts are worth checking, and you can always call, email, or visit in person to ask if you have gap insurance.

3. Check your financial documents.

If you do not have gap insurance through your dealership, lender, or car insurance company, you probably are not covered. But as a last resort, you can look through your financial records – such as your online bills, credit card statements, and checkbook – to try to find some clues.

Finally, if you realize you don't have coverage, check out WalletHub's recommendations on when gap insurance is worth it and where to buy gap insurance.

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.

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, or an unclear fault determination. But 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.

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.

Gap insurance does not pay when a car needs normal repairs, when a car is damaged but not declared a total loss, or when a driver does not make the necessary payments. Gap insurance only pays when a car is totaled and there is a difference between the lease or loan balance and the car's value.

It's also worth noting that certain insurers limit the amount a gap insurance policy will pay, often to 25% of the car's value. Policies with a 25% cap are usually called “loan/lease coverage.”

Gap Insurance Won't Pay For:

• A car's reduced value after an accident that does not total it
• Normal repair needs
• Replacement parts
• A rental car after an accident
• A new car
• The gap between the car's value and the loan or lease balance after engine failure
• Extended warranty coverage that was included in the original loan or lease balance
• Money included in a loan or lease balance that was rolled over from a previously financed car
• Injuries, lost wages, or damage to other people's property from an accident
• Car payments missed due to unemployment, injury, disability or death

In addition, many gap insurance providers will not pay your collision or comprehensive deductible, though it depends on the specifics of your policy.

Since gap insurance has so many limitations, it is only intended to be used in conjunction with liability, collision, and comprehensive insurance. For more details, check out WalletHub's information on gap insurance and whether it's worth buying. 

No, gap insurance does not cover death, since it only pays for the difference between a car's value and any auto loan or lease balance remaining if the car is declared a total loss. Gap insurance also does not cover medical bills, funeral costs, or car payments if the policyholder, a passenger, or another driver dies.

Gap insurance will make car payments if the car is totaled due to theft or an accident, but not if the owner is simply unable to pay. Generally, if a car's owner dies, any co-signers or joint owners of the car will become responsible for the car payments. If there are no co-signers or joint owners, the car will become part of the deceased's estate, or combined assets. The executor or administrator of the estate will then determine whether the estate can afford to continue paying the car loan or if the car will have to be repossessed by the lender.

On the other hand, liability coverage, personal injury protection (PIP), uninsured motorist coverage, and MedPay insurance all include death benefits in certain situations. For instance, if you are at-fault in a car accident that kills another person, your bodily injury liability coverage will pay for their medical or funeral expenses up to your policy limits, and vice versa. Similarly, PIP, which covers injuries that you sustain regardless of fault, includes death benefits that may pay for funeral expenses, medical bills, and loss of income. Uninsured motorist coverage and MedPay usually cover funeral expenses as well.

Yes, gap insurance covers theft if the car is deemed unrecoverable or if the car is recovered but has sustained enough damage to total it. Gap insurance pays for the difference between a car's actual cash value (ACV) and the auto loan or lease balance if the car is declared a total loss due to theft or an accident.

Gap insurance companies usually require a waiting period of around 30 days before a stolen car can be deemed impossible to recover. After this waiting period, most gap insurance companies will ask for a copy of the police report detailing the theft before agreeing to pay for a claim.

On the other hand, if a car is recovered after being stolen, gap insurance will only pay if it's considered “totaled.” Each state has different rules on what constitutes a total loss, based on the estimated price of repairs compared to the car's value.

To receive a gap insurance payout for a stolen car, get a copy of the police report, file a claim with your standard insurer, and then file a claim with your gap insurance provider. Gap insurance companies thoroughly investigate claims for stolen cars to prevent fraud, so expect a wait before receiving a check.

No, you cannot get a gap insurance refund after a total loss if you file a claim, though you will likely receive a gap insurance payout. Gap insurance refunds are only for unused portions of a gap insurance premium, and filing a claim means that you used your gap insurance coverage.

However, if your car is declared a total loss and you don't need to file a gap insurance claim, whether or not you will get a refund depends on your insurer and your state's laws.

For instance, say you paid upfront for gap insurance on a five-year loan and your car is totaled four years into the loan, but there is no gap to cover because the car is worth more than the loan balance. In this case, you might be able to receive a refund for the next year's worth of gap coverage, depending on your policy details and your state's laws.

It's unlikely that a driver will be retroactively refunded for previous months of coverage, though.

Yes. You need gap insurance if you have full coverage and still owe money on a car loan or lease. Gap insurance is needed on top of full coverage because the types of insurance that go into full coverage do not cover the difference between what you owe on a loan/lease and the car's actual cash value, like gap insurance does.

Gap insurance – short for guaranteed asset protection insurance, and sometimes called loan/lease payoff coverage – protects you financially from having to cover the cost of depreciation, or the difference between what you still owe on your contract and what your insurance company says the vehicle is actually worth today. Collision and comprehensive protection – the main components of full coverage, along with liability insurance – won't cover that. As a result, you need gap insurance even if you have full coverage, especially if your situation leads to a relatively large gap to cover

When You Need Gap Insurance If You Have Full Coverage

• You're financing/leasing a new vehicle for a long term (60+months).
• You made a small down payment on a new vehicle (less than 20%).
• You rolled over negative equity from a previous auto loan.
• You financed a vehicle that has a high depreciation rate.
• Your contract has a high interest rate.
• Your lender or lessor requires gap insurance.

It's important to remember that while gap insurance isn't required by any insurer or state, having gap insurance on top of full collision and comprehensive coverage will probably be required by your lender if you're financing/leasing a new vehicle, and even some used vehicles. In addition, gap insurance is meant specifically for drivers who still owe a balance on their vehicle, so if you own your car outright and have full coverage, you don't have a need for gap insurance.

No, you should not buy gap insurance from a dealer in most cases. Gap insurance from a car dealership typically costs much more than gap coverage from an insurance company, bank, or credit union, and the cost is usually added to your loan balance, meaning that you have to pay interest on it. The only reason to buy gap insurance from a dealer is if you cannot find the coverage options that you want from another source.

The cost of gap insurance from a dealership can range from $400 to $700, plus interest. On the other hand, gap insurance from your car insurance company will likely cost $20-$40 per year, or about 6% of your collision and comprehensive premium. If your insurer doesn't offer gap coverage, standalone-policy providers sell it for $200+. Since you normally don't need gap insurance for more than a few years, paying extra for dealership gap coverage isn't usually worth it.

Pros and Cons of Dealership Gap Insurance

Dealerships have several arguments for why you should buy gap insurance from them, rather than from an insurance company. For instance, dealers might say they will cover your deductible while an insurer won't, or that an insurer will only pay a portion of your loan. It is true that some insurers will only pay 25% of your car's value, but others do not have a maximum. Similarly, insurance companies have different rules on whether they will pay your deductible.

Finally, dealerships argue that buying their gap insurance means you don't have to worry about your rates going up or your policy being cancelled if you file a claim. However, it's safe to assume that you'll already be filing a collision or comprehensive claim if you need a gap insurance payout, so you won't be able to avoid a claim by buying dealership gap insurance.

If you're considering purchasing gap insurance, be sure to compare the coverage details and prices of dealership gap insurance with your other options. You should only buy gap insurance from the dealer if you decide it's worth the higher price tag.