Understanding gap insurance

Gap coverage is a form of auto insurance that will cover the difference between what you owe on your car loan or lease and the vehicle’s actual cash value, which your insurance company will pay if it is totaled or stolen. Although not mandatory for all drivers, you may be required by your lender or leasing agent to carry gap insurance.

Key highlights

• If your car or truck is stolen or totaled, gap insurance pays the difference between what you owe on your loan or lease and the vehicle’s actual cash value.
• Gap insurance is affordable optional coverage, with sample premiums starting at $24 a year.
• You may be required to buy gap insurance if you have leased or financed your car or truck.

What is gap insurance?

Gap insurance – also called guaranteed asset protection or loan/lease gap coverage – will cover the difference between the amount that you own on a car loan or lease and the vehicle’s current market value in the event that it is totaled in an accident or stolen.

If you are carrying comprehensive and collision insurance on your vehicle and it is stolen or totaled in an accident or other covered peril, your policy will only reimburse your lender the actual cash value of the vehicle, not the amount you owe on the loan or lease.

Unfortunately, new vehicles lose value quickly – as much as 20% within the first year – and that drop in value often means drivers will owe more on their loan or lease than the vehicle is worth if it is totaled within the first three to four years of ownership, says Janet Ruiz, director of strategic communication for the Insurance Information Institute (Triple-I), an industry research and educational organization.

Gap insurance will step up to cover this “money gap” between the vehicle’s market value and what you owe, Ruiz says. If you are not carrying gap coverage, you will be responsible for the balance of your car loan or lease, which can easily run into the thousands of dollars.

Gap insurance typically must be purchased when you buy the vehicle or within the first 30 days of ownership. Many leases include gap coverage in the lease.

What does gap insurance cover?

Gap insurance is designed to cover the difference between your vehicle’s actual cash value (ACV), which your full auto policy will cover, and the amount you owe on your car loan or lease. Some gap policies will also pay your collision or comprehensive deductible.

It is important to remember that you must be carrying collision and comprehensive coverage in order to purchase gap insurance. If you have a loan or lease on your vehicle, your lender will require that you carry these coverages to protect their investment in your vehicle.

What doesn't gap insurance cover?

While gap insurance will help pay off your lease or loan, it does come with several exclusions. Typically, gap coverage will not cover your security deposit, late payments or any late charges due to overdue fees.

Here are a few expenses that may be excluded from your gap coverage:

• Overdue lease/loan payments
• Extended warranties
• Carry-over balances from a previous loan or lease
• Financial penalties imposed under a lease
• Security deposits
• Aftermarket equipment
• Vehicle repairs
• Property damage you cause to others or to yourself
• Legal and medical costs

Always read your policy in full and ask questions about anything you don’t understand, including exclusions.

How does gap insurance work?

Assume you bought a car for $40,000 with a $5,000 down payment and a $35,000 loan. You are carrying full coverage insurance with comprehensive and collision insurance and a deductible of $500. A year after buying that vehicle, you are involved in a serious accident and your car is totaled.

If you do not have gap insurance, you would be responsible for the shortfall between what you still owe on your loan and what your vehicle’s fair market value is. You would also be on the hook for your $500 deductible on your collision insurance. That would be more than $5,000 in this case.

If you had gap insurance, that policy would cover the gap between your outstanding loan balance and what your insurer pays to your lender. You will still have to pay the $500 deductible yourself, however, as gap insurance typically does not cover this.

How much does gap insurance cost?

The average cost of gap insurance ranges widely, according to our rate analysis. Coverage can cost as little at $24 per year on average at Sentry Insurance. On the other end of the price spectrum, it costs an average of $238 for coverage from Erie Insurance. Bear in mind that the amount you pay may be different, based on what carrier you choose, the kind of vehicle you drive, and other factors.

The rates below were collected from auto insurance comparison site CarInsurance.com for single, 40-year-old male and female drivers of a 2023 Honda Accord LX with a good insurance score and no violations on their record for full coverage insurance policy with liability limits of 100/300/100 and a $500 comprehensive and collision deductible.

Gap insurance is typically sold by car insurance companies, banks and credit unions that finance vehicles, lease companies and even car dealerships. In most cases, purchasing a policy from an insurance company is the best deal, dealerships and banks tend to charge more for gap coverage.

How is gap insurance calculated?

A gap insurance premium is calculated based on the loan amount as well as the type of vehicle you own and its expected depreciation rate. Personal risk factors (your driving record, for example) will also affect the premium.

Some vehicles depreciate quicker than others. Luxury models, electric vehicles and sports cars tend to lose value the fastest, so gap coverage for those vehicle types will be more expensive than coverage on a minivan, for example. In general, the larger the car loan amount, the higher your premium will be for gap insurance.

Frequently asked questions

Is gap insurance worth it?

If you are financing or leasing a new vehicle, gap insurance is often worth the cost. Gap insurance can be relatively inexpensive. According to our analysis, sample annual premiums range from $24 to $238.

Once your loan balance drops below the value of the car (usually two to four years) you should drop gap insurance as it is no longer helpful.

How do I get gap insurance?

Many auto insurers – though not all -- offer gap coverage. State Farm, for example, does not sell gap insurance, but does offer similar coverage called Payoff Protector to policyholders who have a vehicle loan with State Farm Bank. Geico also does not offer gap insurance.

If your current insurer doesn’t offer gap coverage it is possible to purchase gap coverage from another insurer. Auto leases typically have gap coverage built into the lease, and many auto loan providers offer gap insurance to their customers as many auto loans require gap coverage.

Is gap insurance mandatory?

While not required by law, most lenders will require that you carry collision, comprehensive and gap coverage to ensure that the loan or lease will be paid if the car is destroyed or stolen. Check with your lender to see which coverages are required.

Are there any alternatives to gap insurance?

Some insurers may offer other optional coverages that can help if your vehicle is stolen or totaled, including:

• New car replacement coverage: This coverage will pay out the amount it costs to replace your stolen or totaled vehicle with a new vehicle that is the same make and model. This coverage doesn’t require a car loan; you can purchase this policy even if you paid for the vehicle in full. However, it does carry some limitations. Notably, it only applies to the first year of ownership or until you hit 15,000 miles, whichever comes first.
• Better car replacement: This is for vehicles that are older than a year. This coverage will replace your vehicle with one that is one model year newer and has 15,000 miles less than the vehicle that was stolen or totaled.

Can I cancel gap insurance?

Like any insurance policy, gap coverage can be cancelled at any time. If you pay off your loan or lease, or if you sell the vehicle, you should cancel your gap policy.

However, if you still have a loan or lease on the vehicle your lender may require that you carry gap insurance until the value of the vehicle drops below the amount left on the loan or lease.

How long does gap insurance last?

Gap insurance stays in force until it is canceled. In most cases, gap coverage is only necessary for the first three years or so of vehicle ownership. Once the amount you owe falls below the vehicle’s ACV, it probably makes financial sense to drop gap insurance.

Do you get any money back from gap insurance?

If you cancel a gap insurance policy before the end of the term, you should receive a pro-rated refund. Check with your insurer as to how much you may be refunded.

When does gap insurance not pay?

Just because you are involved in an accident doesn’t mean your gap coverage will apply. If your vehicle is not totaled, for example, gap coverage doesn’t come into play at all. Here are a few other situations where gap insurance doesn’t pay out:

• Your comprehensive or collision claim is denied
• You haven’t paid your premium, and your coverage has lapsed
• Your vehicle is not considered a total loss

Also, gap insurance doesn’t cover medical or legal bills if you are injured. It only applies to the gap between your loan balance and the insurance payout for your car.

Do I need gap insurance if I have full coverage?

Full coverage simply means you are carrying liability, collision and comprehensive insurance. While your collision or comprehensive coverage will pay out the actual cash value of your vehicle if it is destroyed or stolen, it doesn’t cover what you owe on your loan -- leaving you to pay the balance out of pocket. Gap insurance will cover this difference, and it may be required by your lender.

Methodology

Editors collected rate information from auto insurance comparison site CarInsurance.com for single, 40-year-old male and female drivers of a 2023 Honda Accord LX with a good insurance score and no violations on their record for full coverage insurance policy with liability limits of 100/300/100 and a $500 comprehensive and collision deductible.

In addition, we also calculated rates for these hypothetical drivers, but with one or more of the following on their record: speeding ticket, at-fault accident, DUI/DWI, poor credit history, or a lapse in coverage.

We analyzed more than 53 million quotes, over 34,000 ZIP codes, and 170 insurance companies nationwide.

Note: 100/300/100 means up to $100,000 for the medical bills of those you injure, up to $300,000 per accident for bodily injury liability for all persons injured in one accident, and $100,000 to repair other drivers’ cars and property you damage.