What Is Gap Insurance and How Does it Work?
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Gap insurance pays out when the amount left on your car loan or lease is greater than the value of your vehicle at the time it’s declared a total loss.
Gap coverage is worth it only as long as you are leasing a car or if you owe more on a loan than your car is worth.
You don’t need gap insurance if you don’t have a car loan or lease.
You won’t need gap insurance forever. Drop gap insurance once your car loan is less than the value of your vehicle.
Gap insurance, or guaranteed asset protection, is an optional coverage that pays the difference between what your vehicle is worth and how much you owe on your car at the time it’s stolen or totaled. This coverage supplements a comprehensive or collision car insurance payout, which can only be as high as your car’s value.
At the time of an incident, you’re responsible for paying off your car loan — even if your insurance payout isn’t enough to do so. This is where gap insurance can come in handy.
If you don’t have a car loan or a lease, gap insurance isn’t for you.
Gap insurance covers what's owed on a car after a total loss
When you buy or lease a new car, lenders typically require that you also purchase collision and comprehensive coverage. Collision insurance pays for damage to your vehicle if you’re in an accident with another vehicle or if you hit an object like a pole or a tree, while comprehensive insurance can cover things like fire or vehicle theft.
Comprehensive and collision insurance pay only what a car is worth at the time of a theft or accident. When you owe more on your car loan or lease than that, gap insurance comes to the rescue.
In most cases, gap insurance does not cover your comprehensive or collision deductible. Your deductible is the amount your insurance subtracts from a claim payout.
Drop gap coverage when your car loan is less than the current value of your car. Online pricing guides like Edmunds or Kelley Blue Book can give you an idea of how much your car is worth. Insurers might not drop it automatically, so you may need to remove it.
How gap insurance works
Let’s say at the time your new car is stolen, it’s worth $25,000 and you have a $30,000 loan. You have comprehensive insurance, which will pay for the value of your car at the time of theft, except for your $500 insurance deductible. So the insurance company pays $24,500 to your lender, but $5,500 is still due on your loan. You will pay $500 of this amount to cover your deductible.
Gap insurance is designed to pay that final $5,000 so you don’t owe money on a totaled car.
Without gap insurance, you’ll have to cover the balance on your loan as well as your insurance deductible.
Below is that example in a nutshell.
Gap coverage example
Loan left to be paid
Current value of car
Comprehensive insurance pays your lender
Amount still due on loan after insurance claim payout
With gap coverage, driver only pays deductible
Without gap coverage, driver pays deductible and pays off auto loan
» MORE: What does car insurance cover?
Is gap insurance worth it?
A lot of people don’t need gap insurance. If you don’t lease or have a loan, or if your loan is paid down below the value of your car, you don’t need this coverage.
Ultimately, if you do have a lease or newer loan, you want to think about whether you can afford to pay the difference between its balance and the value of your car. If you can’t, or don’t want to deal with that situation in an emergency, you may benefit from gap coverage.
Gap insurance providers
You can generally only buy gap insurance within three years of buying a new car. Although insurers’ guidelines vary, a company may require one or both of the following:
Your car is no more than two to three years old.
You are the original owner of the vehicle.
To avoid paying interest on it, NerdWallet recommends buying gap coverage through your auto insurer rather than from a dealership. Not all car insurance companies provide gap coverage (or an equivalent) or offer it in all states, so you may need to switch companies.
There are three main ways to buy gap insurance:
From your auto insurer, as part of your regular insurance policy.
From a company that sells gap insurance only. Stand-alone gap insurance is typically sold online through a one-time purchase from a website such as Gap Direct.
Through the dealership or lender, rolled into your loan payments. With this arrangement, you’re paying interest on the cost of your gap insurance over the life of the loan, making the coverage far more expensive.
If you buy through your dealership or lender:
If you have a car loan, first check your contract to see if you’re required to have gap insurance. Although some lenders may require the coverage, it’s rare. However, your lender will generally require you to buy comprehensive and collision coverage.
A dealer may automatically include gap insurance if you lease your car, so make sure to check your lease agreement.
If you already bought gap insurance from your dealer and want to buy it from your insurer, you may be able to remove it from your car loan contract. Make sure you have coverage during the transition if you switch providers.
Insurance companies that sell gap coverage
Some of the largest insurance companies that offer stand-alone gap insurance as add-ons to car insurance policies are:
» MORE: Get the cheapest car insurance
How much does gap insurance cost?
Auto insurers typically charge a few dollars a month for gap insurance or around $20 a year, according to the Insurance Information Institute. Your cost depends on individual factors like your car’s value. You’ll also need to buy comprehensive and collision coverage. To find the best company for you, compare car insurance rates with at least three insurers.
Lenders charge a flat fee of around $500 to $700 for gap insurance, according to United Policyholders, a nonprofit consumer group, though credit unions may charge less than other lenders.
Remember, if you add the coverage to your loan, you’ll also pay interest on it. That means you could pay more than $700 for three years of gap coverage from a dealer compared with $60 from your auto insurer.
Prices and interest rates will vary, so always check with your dealer and car insurance company to accurately compare costs.
Alternatives to gap insurance
Gap insurance isn’t the only way you can protect yourself if your car is stolen or totaled. Depending on your needs, you may want to add one of the coverage options below instead of gap insurance:
New-car replacement insurance: If you’re more worried about buying a new vehicle than paying off your old one, new-car replacement coverage might be a better choice for you (albeit more expensive). This coverage helps pay for a new car of the same make and model, minus your deductible, to replace your vehicle with a new one.
Better-car replacement coverage: If your vehicle is declared a total loss, this type of coverage will give you money for a model that is newer and has less mileage.