What Is Gap Insurance?

What Is Gap Insurance?

Gap insurance (also known as guaranteed asset protection insurance) is an optional coverage that pays the difference between the amount owed on your vehicle and the car's actual cash value (ACV) when your car is a total loss. Your car's ACV is what the insurance company determines its value to be after considering depreciation. Though rates of depreciation can vary from car to car, all cars depreciate starting the moment you drive off the dealer's lot.

Meanwhile, your loan balance may not decrease as quickly as your vehicle loses value, even when you're making monthly payments on time. The process of loan amortization allocates higher portions of your early payments to interest instead of principal, so your progress toward paying down your loan balance can be slow to start.

Gap insurance protects you from having to come up with additional cash to cover the gap between a low ACV and a high loan balance. It also protects your lender by helping to make sure they receive the full amount owed if your car is a total loss.

How Does Gap Insurance Work?

Here's a quick example of gap insurance in action. Your car is totaled in a crash, and although you bought it for $35,000 just last year, your insurance coverage pays its actual cash value of $30,000. The balance on your car loan is $32,500. Gap insurance pays the additional $2,500 you owe so you can pay your loan off in full.

Gap insurance is meant to cover that one very specific risk described above. Here's a quick chart that shows some of the many items gap insurance doesn't cover.

Learn more: What Are the Different Types of Car Insurance?

How Much Does Gap Insurance Cost?

The average cost of gap insurance from a major insurance carrier is around $90 a year or $7.50 per month, according to Insure.com. Purchasing gap coverage at the dealership when you finance or refinance has an average one-time cost of $500 to $700, though your actual cost could be higher depending on the state you live in, the cost of your vehicle and the finance company you and your dealer are working with.

Getting gap insurance through a dealer generally costs much more than working through an insurance company. Also be aware that folding a one-time fee for gap coverage into your auto loan will mean paying interest on it over the life of your loan, adding even more to your total cost.

Pros and Cons of Gap Insurance

Gap insurance has several pros and cons. Although it's considered extra coverage, it's an extra that may save you money during a financially stressful time. On the other hand, it adds a regular expense for coverage you don't necessarily need. Here's a short list of benefits and drawbacks to consider when looking at gap insurance.

Do You Need Gap Insurance?

In most cases, gap insurance is completely optional. Having it may give you some extra assurance if your loan balance is substantially higher than your car's depreciated value, but it isn't legally required in the way minimum insurance coverage is.

When you're financing a new car, your dealer may offer you gap coverage. Ask them directly if the lender requires it. If it is required, gap coverage may be written into your lease agreement and priced into your monthly payment. However, it's worth asking if it's possible to use your own gap insurance instead; it could save you a few dollars. If not, it's up to you whether you want the extra coverage.

Learn more: How Much Car Insurance Do I Need?

Is Gap Insurance Worth It?

Gap insurance may be worth the cost if your car's current value is less than your outstanding loan balance—and if that gap is more than you could comfortably afford to cover yourself.

Check your current loan balance and compare it to your car's estimated value using an online estimator like Edmunds or Kelley Blue Book. If your car's approximate value is well above your loan balance, you probably don't need gap insurance. If it's lower than what you owe, you may want to explore further.

Here are a few additional clues that suggest you should consider (or skip) gap insurance.

When to Get Gap Insurance

If any of these conditions apply to you, it may be a good idea to get gap insurance:

• You put less than 20% down on your car
• You are financing your car over five years or more
• You're in the first year or two of paying your loan
• Your lender or leasing company requires it
• Your vehicle is likely to depreciate quickly
• You rolled negative equity from your previous car into your new loan
• Covering the gap yourself would be a financial strain

When to Skip Gap Insurance

You don't need gap insurance when your loan balance is less than your car's value, as may be the case in these instances:

• Your down payment or trade-in gave you 20% or more in equity to start
• Your car is worth more than your loan balance even with depreciation
• Your car is used (used cars typically aren't covered by gap insurance)
• You've had your car for more than a few years
• You can comfortably cover the gap out of pocket
• Your car is paid off or your loan balance is low

Learn more: Is Gap Insurance Worth It?

How to Get Gap Insurance

You can get gap insurance from an insurance company that offers auto insurance or a dealership, though working through a dealer may cost you significantly more. Here are a few steps to follow to learn more about getting gap insurance for your vehicle.

• Add gap insurance to your auto insurance policy. Contact your current insurance company and ask for a quote to add gap insurance. Be forewarned: Gap insurance isn't available from every insurer and it isn't offered in every state. Additionally, you may be required to carry collision and comprehensive coverage to qualify for gap insurance.
• Get a quote for a new policy or standalone gap insurance. If your current insurer doesn't offer gap insurance, or you want to make sure you're getting the best rate, get a few quotes for a new auto policy that includes gap insurance or for standalone gap insurance. An insurance broker or online insurance marketplace can help you sort out your options.
• Consider gap coverage from a dealer when you're buying or leasing a car. If you're heading to the dealership to negotiate a new car loan or lease, find out what your options are first. Get quotes before you sit down with the dealer, lender or leasing company. Ask whether gap insurance is required and, if so, whether you can use your own insurance. If you must go with their gap coverage, ask if it can be canceled for a partial refund if you sell, refinance or prepay your loan.

Learn more: Can You Get Gap Insurance at Any Time?

The Bottom LIne

Gap insurance can provide valuable coverage if your car's current value is substantially lower than your outstanding loan balance. If you're considering gap insurance, start by making sure you aren't already covered under your existing loan or lease agreement. Also, make sure your loan balance isn't already well below your car's value. Be prepared to get a few quotes from your current insurance company and possibly a few others. You're likely to get a better deal from an insurance company than your car dealer.

Your need for gap insurance won't last forever. A few years into your loan term—sooner if you put a substantial amount down or are making extra payments—you probably won't have a gap to insure. Your coverage may expire or you may cancel it.