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.

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What is gap insurance?

“Gap” is short for general asset protection. Gap insurance is also known as loan or lease gap coverage. As the name implies, it covers the gap between the amount of money your insurance company pays you if your vehicle is stolen or declared a total loss and the remaining balance of what you owe on your car loan.

Gap insurance in Massachusetts is supplemental coverage — it is not required by law, but you have the option of adding it. Although it is not a legal requirement, your lender or lessor may require you to purchase gap insurance if you financed your vehicle.

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

Gap insurance is often used in conjunction with other types of coverage. Here is a comparison of how each works.

Gap insurance Comprehensive Collision
What it covers The difference between the amount still owed on a new or leased vehicle and the actual cash value paid out by an insurance provider to a policyholder if the vehicle is stolen or declared a total loss Covers losses, damage and repairs due to theft, fire, animal collision, falling objects, wind, hail or flooding Covers losses, damage and repairs due to a crash or collision with another vehicle or a stationary object
Who offers it Many insurance companies, finance companies and car dealers Most insurance companies Most insurance companies

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

    • The cost of gap insurance is normally much less than what you could end up paying out of pocket to fulfill your loan or lease obligations if your vehicle is totaled. Prices vary, so you may want to shop around for quotes. Note that if you purchase it separately, gap insurance can be more expensive than it would be if you added it to your existing car insurance policy. You may purchase gap insurance through your financing company instead, but be aware that doing so might add it to your loan. Therefore, you would likely pay interest on it.
    • 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.