How does gap insurance work and do you need it?

The dramatic plummet of your new car’s value as soon as you drive it off the dealer’s lot can put significant strain on your finances if your car is totaled.

That’s why when insuring a new car, you need to know the role gap insurance plays in protecting your investment.

If you’re entitled to an insurance payout for a totaled car, your car insurance company pays you the vehicle’s actual cash value (ACV). Unlike replacement value, actual cash value considers the replacement cost of the vehicle and then deducts depreciation. ACV will always be less than the cost to replace the car.

The amount your insurance company calculates as your car’s actual cash value can be thousands of dollars lower than what you still owe on your car lease or loan, especially within the car’s first few years of ownership. Since you’re responsible for paying the remainder of your lease or loan even when your car is totaled, you have to come up with the difference.

That is unless you have gap insurance.

What is gap insurance?

Gap insurance is an optional coverage that pays the difference between the amount a car insurance company pays for your totaled car and the amount you owe on your lease or loan. Without gap insurance, if you owe more on your loan than the actual cash value the insurance company will give you, you’ll be faced with coming up with the rest.

Here’s how gap insurance works:

You buy a new car worth $30,000 and you put down $2,000 to pay other taxes and fees. Your loan is for $28,000.

A few months later, you total your vehicle in an accident. Your insurance company determines the actual cash value of the vehicle is $25,500. You have a $500 deductible, so your insurance claim payout ends up being $25,000 leaving you with an extra $3,000 to come up with to pay off your car loan. If you have gap insurance, this amount would be covered by your insurance company.

Do I need gap insurance?

You might need gap insurance if any of these situations apply:

• If your auto loan term is 60 months or more
• If you paid less than 20% down on your auto loan
• If you’re leasing a vehicle check your lease agreement first to see if it includes gap coverage.
• If you owe more on the vehicle than it is worth
• If you have financed a new vehicle

What is not covered by gap insurance?

Gap insurance should not be confused with coverage for anything above what your standard car insurance will cover. There are things gap insurance does not cover:

• Medical bills
• Property damage
• Damage to your car that isn’t a total loss
• Car problems, like mechanical issues that are not covered by our car insurance policy
• Past due lease or loan payments
• Excessive use penalties imposed by a lessor
• Non-refunded security deposits by the lessor
• Non-factory installed equipment
• Depreciation deducted by the primary insurer
• Extended warranties
• Carry-over balances from other loans or leases

How much is gap insurance?   

Gap insurance is surprisingly affordable, at an average of less than $88 a year or $7 per month. But as with any insurance, the cost depends on where you buy it.

Insurance companies typically calculate gap coverage rates at 5% to 6% of your comprehensive and collision coverage costs.

That means if your auto insurance policy premium is $600, gap insurance will typically add around $30 to that.

Your cost will depend on where you get your gap insurance. Insurance companies use different factors in determining their rates and so their prices vary. In most cases, you can get a better deal on gap insurance through your insurance company than through a car dealership. In a report from the National Consumer Law Center, some dealerships marked up gap insurance costs by up to 300%.

How much does gap insurance cost in each state?

Gap insurance costs vary depending on the state, insurer, and coverage terms. Some dealerships and lenders provide standalone gap insurance policies for a one-time fee. The table below outlines the average cost of gap insurance across each state.

How is loan or lease coverage different from gap coverage?

Similar to gap insurance is lease/loan coverage. Lease/loan coverage covers the gap between what you owe on your car and its actual cash value. However, the difference is that lease/loan coverage only provides a payout to a certain percentage of your vehicle’s value, typically around 25%. If your $30,000 vehicle has depreciated to $25,000, then loan/lease coverage covering up to 25% would pay up to $6,250.

Not all insurance companies offer gap insurance, but many offer lease/loan payoff coverage if they don’t have gap coverage. While very similar to gap insurance, lease/loan payoff coverage only pages up to a certain percentage of the ACV of the totaled vehicle.

Where to buy gap insurance

There are a few different options for buying gap insurance, including buying from an insurance provider, a dealership or a third-party company. It is essential to know that the costs will vary significantly, depending on which you choose.

Which insurance companies offer gap insurance?

Most major car insurance companies offer gap insurance as an add-on to your standard car insurance policy if you carry collision and comprehensive coverage. Buying coverage through your insurer is often the cheapest option for gap insurance.

Insurance companies may refer to their gap coverage as loan/lease coverage, which may be slightly different. Here is a list of companies that offer gap insurance:

• AIG
• AAA
• Allstate
• Ameriprise
• American Family
• central mutual
• Chubb
• CSAA Insurance Group
• Esurance
• MetLife
• Mapfre
• Nationwide
• Plymouth Rock
• Progressive
• Safeco
• State Farm
• Travelers
• USAA

Can I buy gap insurance through a dealership?

You can also choose to purchase gap insurance through the car dealership where you’re purchasing the car. However, remember that you will pay an average of 300% more than through an insurance company.

Are there standalone policies for gap insurance?

There aren’t many companies that offer gap insurance as a standalone policy. Those who do often charge more than it will cost to add the coverage to your existing car insurance policy. However, if you’re interested in a standalone policy, the option is available through companies like GapDirect.

Can I get gap insurance after an accident?

You cannot buy gap insurance after an accident and have it cover that specific incident. Gap insurance is designed to protect you if your vehicle is totaled or stolen during the time you owe more on the loan than the car’s actual cash value.

If you did not have gap insurance at the time of your accident and your car is totaled, your regular auto insurance will typically pay the actual cash value of the car, which may be less than what you still owe on the loan. In that situation, you’re likely responsible for paying the difference out-of-pocket.

Does gap insurance cover theft?

No, gap insurance does not cover theft. Gap insurance is designed to cover the difference between what you owe on your car loan and the car’s actual cash value (ACV) in the event of a total loss. Your auto insurance typically covers the loss if your vehicle is stolen and not recovered. 

Does gap insurance cover your deductible?

No, gap insurance does not cover your deductible. The deductible is the out-of-pocket amount before your insurance coverage kicks in. While gap insurance covers the difference between your car’s value and what you owe on your loan, it does not help pay for your deductible. You would need to pay the deductible yourself, whether it’s for collision, comprehensive, or other types of insurance.

Alternatives to gap insurance coverage

Gap insurance protects you if your car is totaled or stolen, and the payout from your standard auto insurance doesn’t cover your entire auto loan or lease balance. It essentially fills the gap between what you owe and what the insurer will pay based on your vehicle’s actual cash value (ACV). However, gap insurance isn’t the only option.

Below are several alternatives to gap insurance

• Loan/lease payoff coverage: Some insurance companies offer their own version of gap insurance coverage under different names, such as loan/lease payoff coverage. This coverage typically works like gap insurance, but the policy terms may differ. You can often add it as an endorsement to your existing auto policy.

• New car replacement coverage: This coverage replaceds your totaled vehicle with a brand-new car of the same make and model rather than just paying its depreciated value.

• Better car replacement coverage:   This coverage is offered by a few insurers and provides a vehicle that is one model year newer and has fewer miles than your totaled car.

• Putting more money down at purchase: If you make a larger down payment on your vehicle, you’ll start with less negative equity—meaning you owe closer to the car’s worth.

Final thoughts

Gap coverage can be a valuable option for drivers who want to protect themselves financially in the event of a total loss, especially if they owe more on their car loan or lease than the vehicle is worth. While it may not be necessary for everyone, it provides peace of mind for those with high-interest loans or long loan terms. Before deciding, it’s important to evaluate your financial situation, the terms of your loan and whether your auto insurance policy already covers any gaps. Always review your options carefully to ensure you have the right coverage.

Methodology

Insure.com commissioned Quadrant Information Services to get gap insurance rates. The premiums are based on sample profiles of 40-year-old male and female drivers. To evaluate the rates we have compared 50,73,544 insurance quotes from 41 insurance companies across 1,461 ZIP codes. 

How much does gap insurance cost in your state?

The cost of gap insurance can vary significantly depending on your vehicle, loan amount, insurance company and state. Gap insurance is an affordable way to protect yourself from paying out of pocket if your car is totaled and you owe more on your loan than the car’s worth.
Below is an overview of how much gap insurance typically costs on average in different states.

Alabama $1,940/Year

Arizona $1,916/Year

Arkansas $2,043/Year

California $2,510/Year

Colorado $2,495/Year

Connecticut $1,800/Year

Delaware $2,132/Year

Florida $2,757/Year

Georgia $2,023/Year

Idaho $1,496/Year

Illinois $1,613/Year

Indiana $1,588/Year

Iowa $1,669/Year

Kansas $1,990/Year

Kentucky $2,336/Year

Maine $1,229/Year

Maryland $1,841/Year

Massachusetts $1,783/Year

Michigan $2,501/Year

Minnesota $1,998/Year

Mississippi $2,095/Year

Missouri $2,186/Year

Montana $2,390/Year

Nebraska $1,989/Year

Nevada $2,146/Year

New Hampshire $1,327/Year

New Jersey $1,975/Year

New Mexico $2,103/Year

North Dakota $1,715/Year

Ohio $1,503/Year

Oklahoma $2,242/Year

Oregon $1,742/Year

Pennsylvania $1,984/Year

Rhode Island $2,144/Year

South Dakota $2,375/Year

Tennessee $1,752/Year

Texas $2,113/Year

Utah $1,900/Year

Vermont $1,384/Year

Virginia $1,538/Year

Washington $1,658/Year

West Virginia $2,040/Year

Wisconsin $1,760/Year

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