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Gap Insurance: What It Is and Who Needs It

Sept. 6, 2017
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Gap insurance pays for the difference between the value of a car at the time it’s totaled or stolen and the balance of its loan or lease. Though it seems to refer to that difference, “gap” actually stands for “guaranteed asset protection.”

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A new vehicle loses some value the minute you drive it off the lot — and 20% to 30% total in the first year. After that, the car’s value will continue to decline. As of 2017, the average rate of depreciation, or lost value, will be 17.8% a year during years two to six, according to Black Book, which tracks used-car pricing.

But standard auto insurance pays 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.

How gap insurance works

Gap insurance supplements the payout you get from comprehensive or collision coverage if your car is totaled or stolen.

» MORE: The 10 most-stolen cars and the cost of theft insurance

Some gap insurance plans will also cover your insurance deductible. That’s the amount subtracted from the payment for a comprehensive or collision claim.

Gap insurance providers

There are three main ways to buy gap insurance:

  • From your auto insurer, as part of your regular insurance payment
  • In a one-time fee through the dealership or lender, which may be rolled into your loan payments
  • In a one-time fee through a company that sells only gap insurance

The three largest insurance companies that offer stand-alone gap insurance as add-ons to car insurance policies are:

Some other insurance companies sell gap coverage that is not part of an auto policy, but as part of a loan or lease. If you finance your car directly through the insurer’s bank, you can get gap coverage from:

  • AAA (check with your regional AAA Insurance provider)
  • State Farm
  • USAA, available only to active military members, veterans and their immediate families

Standalone gap insurance is typically sold online through a one-time purchase from a website such as Gap Direct or Gap Insurance Quotes.

An alternative to gap insurance is called loan/lease payoff. Instead of paying your debt balance, this coverage pays a set percentage of your car’s value, often around 25%, on top of the regular insurance check. Major insurance companies that offer loan/lease payoff include:

» MORE: Compare car insurance

How much does gap insurance cost?

Auto insurers typically charge around $20 a year for gap insurance, according to the Insurance Information Institute. You’ll also need to buy comprehensive and collision coverage.

» MORE: What does car insurance cover?

Lenders may charge a flat fee of $500 to $700 for gap insurance, according to United Policyholders, a nonprofit consumer group. If you finance the car through a credit union, gap coverage may be less. Either way, if you add the coverage to your loan, that means you’ll also pay interest on it.

If you purchase standalone gap insurance online, it’ll typically cost around $200 to $300 one time.

Adding gap coverage to an auto insurance policy is typically the best buy. You generally need it just for a few years until the gap between what you owe and what the car is worth closes. Not all car insurance companies provide gap insurance or an equivalent, or offer it in all states.

When gap insurance is worth it

Gap insurance may be worth it if you:

  • Made a small down payment on a new car, or none at all
  • Agreed to a loan term longer than 48 months
  • Drive a lot, which reduces a car’s value more quickly
  • Lease your car  
  • Bought a car that depreciates faster than average