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A vehicle becomes a depreciating item over time as age and miles reduce its worth. Because of this, car insurance companies provide a fair market value of a vehicle if it’s totaled due to an accident. If you owe more than what the car is worth, you could have to pay this difference back to the lender unless you have guaranteed asset protection (gap) insurance.

This guide will better help you understand when you could need it and what gap insurance costs.

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.

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 does gap insurance cost?

The average annual cost of gap insurance is $36-$80 through auto insurance companies according to carinsurance.com. How much is gap insurance if you purchase through a lender policy? A lender policy, which you purchase through your lender, can be up to $700 per year. This cost is typically rolled up into your monthly payments.

How to buy gap insurance

You can buy a gap coverage through:

  • Your auto insurance provider, which can add the optional policy to your account.
  • Your car dealership, which might allow you to buy the policy outright for one lump sum or to package the premium into your financing.
  • A company specializing in selling gap insurance.

Examples of coverage by insurance company

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. Moreover, you can receive gap insurance coverage bundled into your existing policy with the company for as little as $5 per month.

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 more than $5,000. It reimburses up to $1,000 of a deductible.

When 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. In fact, most vehicles’ value depreciates about 20 percent in the first year of ownership, according to Allstate. 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. That’s especially true if the accident occurs soon after you drive off the dealer’s lot and the car hasn’t suffered as much depreciation.

It’s a good idea to compare your total gap insurance cost — including taxes and anything else you rolled into the lease — 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, however, 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.

Gap insurance for leased cars

Like any car or SUV, leased vehicles depreciate quickly. In fact, most vehicles’ value depreciates about 20 percent in the first year of ownership, according to Allstate. 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. That’s especially true if the accident occurs soon after you drive off the dealer’s lot and the car hasn’t suffered as much depreciation.

It’s a good idea to compare your total cost — including taxes and anything else you rolled into the lease — 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, however, that the gap is constantly fluctuating, making it important to know where to buy gap insurance. 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 definitely won’t 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 that specializes in standalone gap insurance.

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. 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.