Gap insurance coverage can help pay off your loan if you total your car and still owe more than it’s worth. We explain how it works, who it’s best for, and where to get it.
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Updated May 28, 2024Guaranteed asset protection — or gap insurance — is an optional coverage you can buy to pay off your loan or lease if someone steals your car or you total it and you owe more than it’s worth. Gap insurance can protect you financially from having to pay the balance on a vehicle you can no longer drive.
Including gap insurance in your auto policy raises your insurance premium slightly, but it can potentially save you thousands in the long run. Knowing how gap insurance works, when it makes sense to add, what it covers, and alternatives to consider can help you determine if it’s worth the extra cost.
Key Takeaways:
You’ve probably heard that a new car loses value as soon as you drive it off the lot. It’s true — many vehicles lose around 20% of their value in the first year, according to the Insurance Information Institute (Triple-I).
If someone steals your car or an accident totals it, an insurance company will only pay you the vehicle’s actual cash value (ACV), which includes depreciation. If you’re financing or leasing the car, your lender will still expect you to pay off the loan — even if you no longer have the vehicle.
Gap insurance — sometimes called “loan/lease payoff” — can cover the difference so your finances don’t take a hit on a car that’s totaled.
For example, say you purchase a brand-new car for $35,000. After a year of owning the car, you get in a crash and your insurance company declares it totaled. Your insurer pays you $30,000 to cover your car’s current ACV, but you still owe $32,000 on your loan. With gap insurance, your insurance company covers the $2,000 difference between your car’s ACV and your current loan balance, but if you don’t have gap coverage, you’d have to pay it out of your own pocket.
Of course, you’ll pay a bit extra on your car insurance premiums to add gap insurance, but it’s usually worth it in these situations.
Still, gap coverage won’t pay for things like injuries, property damage, or vehicle issues unrelated to theft or a covered accident. It also won’t cover finance charges or fees for exceeding your lease miles.
When you’re financing or leasing a new vehicle, gap insurance might be a good idea if you:
Not all scenarios require a gap policy. Here are situations where it doesn’t make sense to buy gap insurance:
A gap insurance policy pays only if your auto insurance company determines that your vehicle is a total loss and the actual cash value of the car is less than the remaining balance you owe. In this instance, your gap policy will pay your lender the difference between the value of your vehicle and your remaining loan balance.
Though gap insurance can cover the financial gap after a claim settlement reduces — but doesn’t eliminate — your auto loan amount, it only provides payoff coverage in certain situations. Here’s what it doesn’t cover:
You can buy gap insurance from your insurance company or the car dealer. Here’s how it works, depending on where you buy it.
Adding gap coverage to a standard auto insurance policy with collision and comprehensive coverage is typically the best and cheapest option. It usually only adds around $20 to your annual premium, according to Triple-I, but it can vary by insurer.
Gap coverage is available through the following insurance companies:
Eligibility requirements can vary. For example, Progressive offers loan/lease payoff coverage that pays up to 25% of your car’s value. Travelers and Allstate only allow it on new vehicle purchases from a dealer. State Farm Bank automatically includes “Payoff Protector” on loans, which is similar to gap insurance.
When buying a new car, most dealers will try to sell you gap insurance during the financing stage. A bank, credit union, or financial institution will charge as much as $700 for gap coverage. If you don’t pay it in a lump sum, it gets added to your loan balance, so you’ll pay interest on top of the cost of gap insurance.
This usually isn’t your best option but can be an easy way to ensure you have coverage as soon as you drive off the lot.
Gap insurance can relieve your financial burden and prevent you from being “upside down” on your car if it’s totaled in an accident or theft. But if it’s not for you or you don’t think it’s worth it, consider these alternatives.
New vehicle replacement coverage can increase your payout after a total loss. Instead of paying your car’s depreciated value, your insurer will pay you the value of a new vehicle of the same make and model.
Adding this coverage costs about 5% of your policy premium, and you usually have to meet mileage and vehicle age requirements. Once your car is too old to qualify — usually three model years — it automatically comes off your policy.
If your car is totaled and you have better car replacement coverage, your insurer will pay you the value of a same-make vehicle that’s one model year newer and with fewer miles — usually around 15,000 less than what your car had.
New car or better car replacement coverage might not pay off your loan balance, but it can help offset what you owe after a total loss. That said, it might cost more than gap insurance and pay less than if you bought gap coverage instead.
You can cancel gap insurance coverage whenever you want, and it’s a good choice if you owe less than the value of your car.
For example, say you paid only a small down payment when you bought your car, financing most of it. A year or two later, you owe $15,000, but your vehicle is worth $20,000. Since you owe less than your car’s current value, canceling gap insurance probably makes sense.
If you’re considering gap insurance coverage, we’ve got you covered with answers to the most common questions about this optional new-vehicle coverage.
Yes. But you usually only have a small window of time when you can add gap coverage to your insurance policy. Your vehicle usually has to be no more than three model years old, and you must be the original lease or loan holder to qualify.
No, gap insurance is optional and not typically part of full coverage. But if you want gap coverage, most insurers require you to have comprehensive and collision coverage, which are part of a full-coverage policy, to buy it.
If you buy gap coverage from your car insurance company, you can drop it whenever you want. But you might have requirements on when and how to drop it if you buy it from a dealership. Make sure to read the fine print on the gap insurance agreement.
Sources
Mandy Sleight has over 15 years of insurance knowledge and expertise in auto, home, life, health, pet, supplemental benefits, and other insurance products. She is a sought-after insurance expert, appearing in Bankrate.com, Moneygeek.com, U.S. News & World Report, Reviews.com, CNET, and other publications. She uses her background and experience working for well-known insurance companies like State Farm and Nationwide Insurance to create engaging and easy-to-understand content to help readers make smarter insurance choices that have a positive effect on their budgets and finances.
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