When you buy or lease a car, you’re making an investment. But ask any financial advisor and they’ll tell you money spent on a car is, in fact, not a sound investment at all. In fact, your car can leave you in a precarious financial situation.
That’s because your car might actually be worth less than you’re paying for it. The AA found that a new car can depreciate as much as 40% in the first year. And if you get into an accident and your car is totaled, your insurer is only going to pay for the fair market value of your car. If that’s less than what you owe on your car loan, you’re left in the lurch.
That’s where gap insurance comes in. Short for “guaranteed asset protection” (gap), this coverage makes up the difference between the fair market value of your car and what you still owe on the vehicle. In other words, it fills in the gap.
What is gap insurance?
Gap insurance is optional add-on car insurance coverage that covers the “gap” between the amount owed on a vehicle and its actual cash value (ACV) in the event it is totaled, destroyed or stolen from a covered claim.
If you’re planning on leasing or buying a car or have already done so, you may be wondering if you should buy gap insurance or possibly where to buy gap insurance. The answer is, it depends.
Gap insurance is always an optional purchase. In some states, though, a car dealer must offer gap insurance at the point of purchase.
Imagine you’ve been involved in an accident and your car has been damaged beyond repair and must be replaced. You still owe $18,000 on your car loan but the vehicle is now worth only $15,000. With gap insurance, you can cover the $3,000 difference between what you owe on your car and what it’s worth, after the deductible. Some policies also cover the deductible.
How much is gap insurance?
You can get gap insurance from two places: the dealership or bank that’s financing your car or an auto insurance provider. Gap insurance is usually more expensive if you get it from the dealership or bank, but if you choose to add it to your full coverage car insurance policy it should cost you around $20 for the entire year, according to the Insurance Information Institute.
That said, a few factors impact your gap insurance cost. Your insurer will likely consider your car’s actual cash value (ACV), your location, age and auto insurance claims history. Ask your auto insurance provider if it offers gap insurance and how much it would cost. This way, you can find out if it’s right for you.
Where to buy gap insurance
Some insurers, like Geico, don’t offer gap insurance, while others vary in how they offer this protection and how it works. Here’s a quick look at a few options:
State Farm: Gap car insurance can be added to a State Farm auto policy. Otherwise known as Payoff Protector, State Farm gap insurance helps you save money because you bundle it with your current auto insurance provider in lieu of going to a third party. State Farm provides this coverage for all loans underwritten by them.
Allstate: The Allstate gap program waives the difference between a primary auto insurance settlement and the outstanding balance owed on a vehicle. It waives covered losses up to $50,000 and reimburses a deductible payment. The deductible is the amount you must pay before the insurance pays the claim.
Progressive: Progressive caps coverage at 25% of the vehicle’s actual cash value. You can receive gap insurance coverage bundled into your existing policy with the company for as little as $5 per month.
Nationwide: Nationwide offers gap insurance but doesn’t waive your deductible if you file a claim, so make sure your deductible is low enough you can afford it in case of a total loss.
AAA: AAA provides gap coverage for vehicles that are fully covered with comprehensive and collision insurance. The insurer will waive up to $1,000 of your deductible if your car is declared a total loss.
Esurance: Esurance (and some other auto insurance companies) refers to gap insurance as auto loan and lease coverage. You’ll qualify for coverage if you’re leasing or paying off a financed vehicle and have full-coverage insurance.
USAA: USAA insurance is available to military and military family members. USAA offers Total Loss Protection for vehicles newer than seven years old that have a car loan of more than $5,000. It reimburses up to $1,000 of a deductible.
Is gap insurance worth it?
Gap insurance is recommended for new vehicles when or if:
- The car loan has a length of five years or longer
- The loan has a high-interest rate because the principal on the vehicle will take longer to pay down versus the depreciation
- You paid a low down payment
Like any car or SUV, leased vehicles depreciate quickly. Therefore, if you didn’t put much money down and you still owe a sizable amount on your total lease payment, you’ll likely owe more than the car is worth if you get into an accident.
It’s a good idea to compare what you’ll pay for your car over the life of your financing to the car’s MSRP or agreed-upon sales price and see if you have a gap from the start. In the event you do, gap insurance is a good idea.
Keep in mind your “gap cost” is always fluctuating. Generally, the difference between what you owe and what the car’s worth shrinks as you make monthly payments and as the car depreciates.
Other situations in which gap insurance might not be necessary include:
- When there was a large down payment or if the purchase was made in full.
- If the initial loan term was short, say three years or less.
Remember to cancel the coverage once the amount owed on the vehicle is less than its value. Check a resource such as Kelley Blue Book to know a vehicle’s approximate actual cash value.
If you’re unsure of whether gap insurance is worth it, consider the cost. Gap insurance is fairly inexpensive and in many cases can be added to your existing full-coverage policy for less than $50 per year. That’s probably far less than the shortfall between your car’s value and what you owe in case of a major accident.
Gap insurance for leased cars
Like any car or SUV, leased vehicles depreciate quickly. Therefore, if you didn’t put much money down and you still owe a sizable amount on your total lease payment, you’ll likely owe more than the car is worth if you get into an accident. Gap insurance coverage for your lease is a smart financial decision.
As with a purchased car, it’s smart to compare your total cost — including taxes and anything else you rolled into the lease — to the car’s MSRP to determine if you have a gap. If so, consider gap insurance.
And just like a purchased car, the difference between what you owe and what the car’s worth shrinks as you make monthly payments and as the car depreciates. So, you may not need the coverage for your entire lease period. You may only need it for a few months, depending on how good of a deal you negotiated.
Frequently asked questions
How do I get the best deal on gap insurance?
You have three options for where to buy gap insurance: through the dealership, an auto insurer or an insurance company.
A gap insurance policy through dealerships can be too expensive to make sense. Make sure to shop around between the dealership, auto insurers and companies that specialize in gap insurance. Your best deal may come from your existing car insurance carrier — if you already have full coverage, you may be able to add gap insurance for as little as $20 per year. When looking for the best deal, make sure you know your loan terms and the value of your vehicle.
Do you get money back from gap insurance?
If you pay a vehicle loan off in full early, you may be entitled to a refund of the unused portion. Some states require insurers to refund the premiums if, for example, a 36-month loan with gap coverage for 36 months is paid in 24 months.
Often, the insurance provider will not let you know if you are due a refund. Make sure to keep your payoff letter, the original contract or insurance information and an odometer disclosure statement. It is important to know an insurer’s refund policy before buying gap insurance. It could be helpful to contact your state commerce department or insurance commissioner office to know state laws and regulations beforehand, or should an insurer refuse to issue a refund.
How does gap insurance work if your car is totaled?
Gap insurance only fills the gap between the actual cash value of a car at the time of a claim and the current amount still owed on a car loan. The specific gap policy covers, for instance, $4,000 on a vehicle assessed at $16,000, but with $20,000 still to be paid on the loan. Total loss can vary by state law and/or by the insurance provider.
Do I need gap insurance if I have full coverage?
While you might feel like your auto insurance coverage is robust, auto insurers don’t offer any one policy called “full coverage” that’s designed to protect you against every possibility. Instead, you get more protection by layering different types of coverage (e.g., liability, collision, comprehensive) together. Adding gap insurance to your existing coverages can be an excellent way to fill out your protection on and off the road, getting you closer to the ideal of full coverage.