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What Is Gap Insurance?

If your car is totaled or stolen, gap coverage can help

Gap insurance is additional — and optional — vehicle coverage that helps you pay off an auto loan if your car is totaled or stolen and you owe more than what the car is worth. Gap, or guaranteed asset protection, insurance is only available if you're the original loan or leaseholder on a new vehicle and already have both comprehensive and collision insurance. It is relatively low-cost and can provide added financial security to help you pay the "gap" between what you owe on a vehicle's lease or loan and what the car is actually worth.

How does gap insurance work?

Gap insurance covers the difference between what you owe on your vehicle loan or lease and your car's actual cash value at the time it is totaled from an accident or theft, or is stolen and never recovered.

Standard auto insurance policies are designed to cover only the current market value of a vehicle at the time a claim is made. And, that value depreciates over time. In fact, most vehicles decrease in value by 20% in their first year, according to the Insurance Information Institute. This means that if your car — which already starts to depreciate once it leaves a dealer's lot — sustains significant damage or is totaled, your insurance policy may assess its value as being less than what you owe.

For example, if your car is deemed totaled and you owe $27,000 on your loan, but your auto insurance company assesses the value of your vehicle at $20,000, you still owe $7,000.

That's where gap insurance comes in. It will cover that $7,000 difference so you don't have to pay out of pocket. However, what's considered a total loss varies by state and by auto insurance provider. Additionally, a gap policy does not cover accident-related costs, such as vehicle repairs, injuries, damages to someone else's property, and vehicle rentals or replacements.

When is gap insurance recommended?

You should factor in the following scenarios when considering whether or not to get gap insurance:

  1. You put little or no money down when you financed your car. If you didn't make a large down payment, you will likely be upside down the moment you drive the car off the lot. Because of financing interest rates, the amount of your car loan may be higher than the market value of the car itself during the first few years of owning that vehicle.

  2. You traded in an upside-down car, meaning you owed more than the trade-in value, and added the amount you owe to your new car loan. This extra balance could come back to haunt you if your car is totaled or stolen.

  3. You bought a car with suboptimal resale value. If you bought a vehicle that traditionally loses value pretty quickly, there is a good chance you'll be upside down unless you made a substantial down payment.

  4. You plan to pile the miles on quickly. If you're racking up miles quickly, you're dropping your car's value quickly. And chances are you're dropping the value faster than you are paying off the loan.

  5. You've taken out a long-term car loan (e.g., 60 months or more). This means it will take longer than usual to hit the break-even point, which is when your loan balance and the car's value begin to equalize.

How to get gap insurance

If you lease a vehicle, gap coverage may automatically be added to your lease agreement at the dealership. According to, many lessors require customers to purchase gap insurance for leased vehicles. You can also purchase gap insurance from a dealership at the time of sale for a flat rate or include it in your lease or loan agreement. Additionally, your auto insurance company may offer gap coverage as an add-on to your policy.

While it is suggested that you get gap insurance as soon as you purchase or lease your vehicle, you may still add this coverage up to 12 months after financing your car, depending on your insurance agency.

Gap insurance costs

The cost of gap insurance depends on the make and model of a vehicle and how fast it depreciates. It also varies by state and can be determined by your age and previous claims. But, the average cost is $60 a year for coverage through an auto insurance provider, according to USA Today.

If you purchase coverage through a private lender, or at the time of financing or leasing at a dealership, you will likely pay a flat fee between $500 to $700. If you add the cost of gap coverage into your car loan, you will likely pay interest on it. However, you could possibly get a refund on your gap policy if you pay off your loan early, as some states require insurers to return unused portions of policy premiums.

Is gap insurance coverage required?

Gap insurance isn't a legal requirement, but some individual leasing companies may require you to purchase it. Also, some dealers may automatically add gap insurance to your new car loan, though you can decline this coverage. Once you do get gap insurance, it applies for the duration of your policy, though you may not need coverage for the entire length of your loan. You can drop gap coverage once you owe less than what the car is worth.

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