Gap insurance

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Purchasing a brand new car is an expense that not everyone can pay for out of pocket; it often requires financing. If the vehicle is totaled or stolen, you still have to pay the outstanding loan amount, besides buying or renting another car to compensate for the loss.

Your standard car insurance will help pay for the expense of buying a new vehicle if your policy includes new car replacement coverage. If your vehicle is totaled beyond repair and the depreciated value is less than what you still owe on the loan, gap insurance picks up where your claim payout might not cover the difference. Guaranteed Asset Protection (GAP) is an optional endorsement that pays the difference between the loan amount and depreciated value of the vehicle.

What is gap insurance?

Gap insurance is optional 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 are 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.

Gap insurance is typically an optional coverage for drivers. In some states, however, an auto dealership is required to offer gap insurance at the point of purchase.

Say you have been involved in an accident and your vehicle has been damaged beyond repair and must be replaced. You still owe $18,000 on your auto loan but the vehicle is now worth only $15,000. Gap insurance would cover the $3,000 difference between what you owe on your car and its current market value, after accounting for deductibles. Some policies also cover the deductible.

Remember that gap insurance typically applies only to vehicles that are brand new, or models less than a year old, that have been totaled or stolen. It does not cover accidents, damages, repairs or a sale or trade-off, even if the financed amount is higher than the value of the vehicle. It will also not help buy you another vehicle — you would need new car replacement coverage to cover the expenses of a new vehicle.

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How much is gap insurance?

You can get gap insurance from a few places — primarily the dealership or lender that is financing your car, or directly from an auto insurance provider. Gap coverage is typically more expensive if you get it from the dealership or lender versus adding it to your car insurance policy.

That said, a few factors may impact your gap insurance cost. Your insurer will likely consider several factors, including your vehicle’s actual cash value (ACV), geographic location, age and auto insurance claims history. Ask your auto insurer if it offers gap insurance and how much it would cost based on your situation to understand if gap insurance is the right financial protection for you.

Where to buy gap insurance

Some auto insurers, like Geico, do not offer gap insurance, while others vary in how this protection is offered and how it works. Here’s a quick look at a few options:

  • State Farm: The largest auto insurer in the U.S., State Farm does not offer gap insurance but has a feature called Payoff Protector, which anyone getting a car loan from a State Farm bank (an alliance with US Bank) is eligible for. Payoff Protector only applies for full coverage car insurance, but this policy does not necessarily have to be underwritten by State Farm. Even if your auto insurance policy is written by a different insurance carrier, if your loan is from State Farm, you are eligible for Payoff Protector at no extra cost.
  • 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 of the claim you are responsible for and is subtracted from your insurance payout at the time of a loss.
  • 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 does not waive your deductible if you file a claim, so be mindful of whether your deductible is low enough that you can afford it in case of a total loss.
  • AAA: AAA provides gap coverage for vehicles that are fully covered, including optional 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 insurers) refers to gap insurance as auto loan and lease coverage. You may qualify for coverage if you are leasing or paying off a financed vehicle and have full-coverage insurance.
  • USAA: USAA auto insurance is available to active and former military and their family members. USAA offers Total Loss Protection for vehicles less 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 by lenders or auto insurance companies for new vehicles when or if:

  • The auto loan has a length of five years or longer
  • 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, typically less than 20%

It is generally recommended to compare what you will 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 may be a good idea.

Keep in mind your “gap cost” is always fluctuating. Generally, the difference between what you owe and what the vehicle’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
  • If the initial loan term was short, say three years or less.

You have the option to cancel the coverage at any time — typically recommended only once the amount owed on the vehicle is less than its market value. If you are unsure of whether gap insurance is worth it, consider the cost to risk. Gap insurance is fairly inexpensive and in many cases can be added to your existing full-coverage policy for a nominal cost per year. That may be far less than the difference 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 did not put much money down and you still owe a sizable amount on your total lease payment, you will likely owe more than the vehicle is worth if you get into an accident. In this situation, gap insurance coverage for your lease might be a smart financial decision.

As with a purchased car, it may help you to compare your total cost — including taxes and anything else you rolled into the lease — to the vehicle’s MSRP to determine if you have a gap.

And just like a purchased vehicle, the difference between what you owe and what the car’s worth decreases as you make monthly payments and as the car depreciates. This means you may not need the coverage for your entire lease period. You may only need it for a few months, depending on your lease agreement.

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Frequently asked questions

How do I get the best deal on gap insurance?

You have a few options for where to buy gap insurance: through the dealership, a standard auto insurer or a specialty gap insurance company.

A gap insurance policy through dealerships can be too expensive to make sense for some drivers, although it can be a convenient option. 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 a marginal annual cost.

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 of your gap insurance. 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.

In some cases, an insurer may 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’s office to learn about your state’s regulations beforehand, or what to do if your insurer refuses to issue a refund.

How does gap insurance work if your car is totaled?

Gap insurance only provides financial protection for the gap between the actual cash value of a vehicle at the time of a total loss claim and the current amount still owed on an auto 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 typically do not offer any one policy called “full coverage” that is designed to protect you against every possibility. Instead, you can get more protection by layering different types of coverage (e.g., liability, collision, comprehensive) together. Adding gap insurance to existing coverage can be an excellent way for some drivers to have greater peace of mind. However, coverage needs and benefits will vary widely by driver.

Written by
Cynthia Widmayer
Insurance Contributor
Cynthia Widmayer has over two years of experience as an insurance and personal finance writer. She covers home, car and life insurance products for Bankrate, the Simple Dollar, and Coverage.com, among others.
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