What Is Gap Insurance? Do I Need It?

Last Updated on May 24, 2023

Gap insurance is a type of insurance coverage for newer automobiles that can be tacked onto your collision insurance policy. It is optional insurance coverage. It could pay the difference between the balance of a loan or lease on a car and what your insurance provider pays if the vehicle is considered a covered total loss. Continue reading below to learn more about gap insurance and whether or not you need it.

Key Takeaways:

  1. Gap insurance is an optional coverage that pays the difference between what you owe on your car loan or lease and what your car is worth at the time of a total loss due to theft or damage.
  2. Gap insurance is worth it only if you are leasing a car or owe more on your loan than your car is worth, which can happen because of depreciation, a small down payment, or a long loan term.
  3. Gap insurance can be purchased from different sources, such as car dealerships, banks, credit unions, auto insurance companies, or third-party providers. The cost and coverage may vary depending on where you buy it from.
  4. Gap insurance does not cover everything, such as your deductible, mechanical repairs, rental cars, or extended warranties. You should check your policy details and exclusions before buying gap insurance.

Gap Insurance Explained

Gap insurance is sometimes called gap protection. It covers the difference between what you owe on your vehicle and how much it is worth. Not everyone needs gap insurance (sometimes called “totaled insurance”).

For most drivers, a standard car insurance policy offers enough protection to cover the cost of damage if their car is vandalized or stolen. However, if you total your car completely and the car’s cash value is less than the amount you owe on your lease or loan balance, the “gap” is not covered by insurance. Your car insurance company won’t pay out more than the vehicle is worth (before it was damaged) – so you will be responsible for paying that cost.

Gap protection is often referred to as insurance, but it is actually a debt cancellation agreement. It covers the difference between the car’s value and loan amount. Before you put up money for gap protection, think about how a gap occurs and how you can close that gap.

Do You Need Gap Insurance?

Some people assume collision and comprehensive coverage offer total protection if their car is stolen or totaled. However, if they’re financing or leasing a new automobile and have a total loss, they could be in for a sad surprise. If you are financing a new vehicle, gap insurance is almost always recommended. If you buy a used vehicle with cash, you probably won’t need it.

You might already have gap insurance and not even know it. To determine if you have gap insurance, check your insurance policy’s declarations page or ask your insurer.

Who Should Get Gap Insurance?

It’s crucial to keep in mind that gap insurance is a specialty product. Most people aren’t going to require it. You’ll likely be able to skip it altogether. If you purchased the car in cash, it’s useless. And, if you put up a big down payment at the dealership, there’s a pretty minuscule chance that you’ll ever see an “upside-down” on your loan.

Taking out a gap insurance policy is a good idea if:

  • You have a loan payoff period of five years or more
  • You’ve got a lease on the car
  • The car you have has a history of quick depreciation
  • You put a lot of miles on the odometer every year
  • You put 20% or less down when you purchased the car
  • You drive a brand new car (gap insurance isn’t recommended for used cars)

Even if you have a tiny amount of negative equity, gap insurance is a good idea. If you have the ability to pay the deficit from your own pocket, you might be better off just risking it. Gap coverage, like other types of insurance, is smart for people who can’t deal with a worst-case scenario.

Gap insurance is sometimes built right into car leases, so it’s a smart idea to look at the contract before you go out and get gap coverage on your own. You shouldn’t pay a premium for something you already have.

An Example

If you just bought a car with a sticker price of $40,000, you might be pretty happy with yourself and your spiffy new car. You put $1,000 down, leaving you with $39,000 to pay over a long period of time going forward in life. You wisely purchased collision coverage with a $500 deductible.

Sadly, a couple of months later, you total your car in an accident.

You file a claim. Your car insurance company tells you they’ll disburse a payment of $36,00 to cover your car’s total cash value. You breathe a sigh of relief but then gasp when you realize you still owe $38,000 on your car! That leaves you owing $2,000, as well as a $500 deductible.

Gap Insurance to the Rescue

Gap insurance would cover the difference between what you owe and what your insurance provider is willing to pay for it. Gap coverage protects you from having to cover the difference.

In most cases, you can only use gap insurance if you’ve bought collision and comprehensive coverage.

Gap insurance is great for people without much money to deal with the worst-case scenario. It is a smart move for people that are too poor, young, or resource-less to deal with a terrible situation involving their car.

Most young people should look into gap insurance if they get their first car and have a protracted lease period. It will save them a boatload of money in the future (that they couldn’t afford to pay) should they get into a serious accident and total their car.

Gap insurance, however, does not cover everything. Click here to see our list of things not covered by gap insurance.

How Much Does Gap Insurance Cost?

Like any auto insurance product, gap insurance costs vary based on how much coverage you need and where you buy it from.

Generally speaking, if you buy your gap insurance coverage from a bank or a dealership, you can expect to pay much more. Banks and dealerships often charge between $400 and $700 annually for gap coverage. However, if you shop around for coverage and buy it through an auto insurance company or add it to your existing policy, you can find coverage for just $5 per month.

Another thing to note is that if you sell your car before paying off your loan, pay off your loan prematurely, or cancel your gap coverage for another reason, you might be entitled to a refund on the gap insurance premiums you already paid.

Frequently Asked Questions About Gap Insurance

Final Word on Gap Insurance

Gap insurance can be an important and useful product, but only for people with serious negative equity in their vehicles. That will include drivers who put a tiny bit of money down or have a long payoff period. If you are looking for a good place to purchase gap insurance, check out our list of the top 5 companies to purchase gap insurance from.

James Shaffer
James Shaffer James Shaffer is a writer for InsurancePanda.com and a well-seasoned auto insurance industry veteran. He has a deep knowledge of insurance rules and regulations and is passionate about helping drivers save money on auto insurance. He is responsible for researching and writing about anything auto insurance-related. He holds a bachelor's degree from Bentley University and his work has been quoted by NBC News, CNN, and The Washington Post.
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