The moment you drive your new vehicle off the dealership lot, it goes down in value — a trend that continues over the life of the car. This can present a difficult situation in the event your vehicle is totaled or stolen. If you owe more money on a car loan than what the vehicle is worth, you could wind up paying the difference out of pocket, potentially costing you thousands. Purchasing gap insurance in Massachusetts might help, but it may not be available for every vehicle.

What is gap insurance?

If you’re financing a vehicle, gap coverage — short for general asset protection — provides financial protection if your car is stolen or declared a total loss. Although the state of Massachusetts does not require gap insurance, your lender or lessor might require you to get it, and the coverage could offer you peace of mind.

Here’s how it works. If your car is totaled or declared a total loss, your insurance provider will typically pay your claim. However, you might still owe your lender or lessor. Since the vehicle likely depreciated since you drove it off the lot, the amount your insurance company paid you might not be enough to cover what you still owe. Gap coverage pays this amount.

How much is gap insurance in Massachusetts?

Gap insurance, much like standard auto insurance, is highly personalized. The exact price you’ll pay for gap coverage in Massachusetts depends on factors like your vehicle type, the actual cash value of your car, your driving history, claims history and more. If you purchase gap insurance through your current insurance provider, you might receive a more favorable rate, but it could pay to shop around.

Since gap insurance is supplemental coverage, it’s usually not as expensive as standard car insurance. Keep in mind that although gap insurance is offered through car dealers or lenders, you might get the best rates from a car insurance company. For instance, Arabella offers gap insurance for just $30 per year.

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How does gap insurance work in Massachusetts?

To understand how gap insurance for cars works in Massachusetts, it is important to address a few details first. Not all vehicles that are financed qualify for gap insurance coverage. Some insurers only offer this type of insurance for new vehicles — typically those no more than one year old.

Secondly, gap insurance is not new car replacement insurance. It may help you pay off an existing car loan, but it does not provide the full funds to replace a totaled vehicle with a new version. The amount covered by gap insurance is typically sent directly to the lessor or lender.

To understand how gap insurance works, consider the following scenario. Say you just purchased a new SUV for $45,000. You chose to finance the vehicle, paying down the loan over five years. After six months, your Ford’s value has depreciated somewhat significantly. It is now worth only $36,000. However, you still owe roughly $42,000 on the loan.

If you cause an accident and your car is declared a total loss, your insurance provider may only pay out the vehicle’s current value of $36,000. However, the lender is still owed the full $42,000 loan balance. If you do not have gap insurance, you might have to pay the difference of $6,000 out of pocket.

On the other hand, say you purchased gap coverage. The car insurance company may help pay the $6,000 difference to fulfill your outstanding loan obligation.

When do you use gap insurance?

Gap insurance typically comes into play if your new car or leased vehicle is declared a total loss or is stolen. A standard insurance policy would likely pay out the vehicle’s actual cash value, which may not fulfill your outstanding loan balance. So if you plan on putting less than 20% down to pay for a new vehicle (the amount a car usually depreciates in the first year), then purchasing gap insurance might provide some peace of mind.

Gap insurance vs other coverage

Since gap insurance is supplemental, it works alongside other types of coverage. To purchase gap insurance, you’ll typically need to have full coverage, which often includes comprehensive and collision coverage. Comprehensive insurance covers damage and repairs caused by theft, fire, falling objects, animal collision, wind, hail or flooding, while collision pays for damage and repairs caused by a collision with another vehicle, a building or stationary object.

Unlike full insurance coverage, gap coverage does not pay for damage or repairs following a covered event. It only pays out the difference between what you still owe and the actual cash value of your vehicle, which is the vehicle’s current market value minus depreciation.

Although gap coverage might seem like minimum coverage, it’s actually quite different. Minimum coverage is typically the minimum insurance that is required by your state. In many states, this means liability-only insurance. Liability includes bodily injury and property damage coverage for other people involved in an accident caused by you.

If you damage or total your vehicle, liability will not cover repairs or pay to replace your vehicle. Typically, you cannot buy gap insurance if you have a liability-only policy. Instead, most lenders or lessors require you to purchase full-coverage insurance before you can add gap coverage. Keep in mind that if you’re financing a vehicle, you’ll usually be required to get full coverage in the first place.

Where to buy gap insurance in Massachusetts

Gap insurance is not mandatory in Massachusetts. It is not standard coverage or included in a basic policy. It is supplemental and designed for short-term coverage when you buy a new vehicle or lease a car. It is only needed initially when the amount you owe on a car loan exceeds the car’s value. Because it is not a specialty coverage, gap insurance is available through many car insurance companies.

If your current insurer does not offer gap insurance, you might be able to purchase it through your dealership or lender. However, gap coverage may be cheapest through your car insurance carrier when you add it to your current insurance policy.

Gap insurance companies in Massachusetts

Most major car insurance carriers in Massachusetts offer gap coverage (with a few exceptions, such as Geico). Some insurers have products that serve the same purpose of gap coverage but call them by a different name. For instance, Progressive has loan or lease payoff coverage, and USAA offers a product called car replacement assistance.

Frequently asked questions

    • Gap insurance is not legally required in the state of Massachusetts. However, if you purchase or lease a new vehicle, your lender or lessor may require you to carry gap coverage. If not, it may be worth the small investment to save upwards of thousands of dollars in case your car is totaled while you owe more on it than its actual cash value.
    • To cancel gap insurance, you would need to contact the company you purchased it through. That could be your insurance provider, lender or car dealer. Depending on whether or not a length of coverage term applies, you may have to adhere to certain cancellation requirements.
    • Gap insurance may be beneficial to drivers who are planning on buying a new car and putting less than 20 percent down to finance it. In this case, gap insurance could help make up the difference between the remaining amount on your loan and the amount the vehicle is worth if it is declared a total loss. In addition, some lending institutions or leasing companies may require you to buy gap coverage.
    • The best car insurance company may not be the same for every driver. Each insurance company has its own way of rating policies, considering factors like your age, driving record, vehicle, ZIP code and more. Therefore, the quotes you receive will vary from one company to the next. In addition to price, you may want to consider things like customer reviews, add-on coverage options, discount opportunities and more. For these reasons, experts recommend doing a bit of research and shopping around with several providers.