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 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, but in some cases your loan or lease contract may require it.

But, what is gap insurance? 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.

How much is gap insurance?

Gap insurance is offered by several insurance companies. You can add it on to your policy from 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 Payoff Protector. Payoff Protector is available with every loan from State Farm Bank, and if certain criteria are met, this feature can pay off the difference between your vehicle’s depreciated value and your remaining loan balance.
• 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 up to $1,000. It is offered for new and used vehicles.
• Progressive: Progressive caps loan/lease payoff coverage at 25% of the vehicle’s actual cash value.
• 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 offers gap coverage for vehicles that are fully covered, including optional comprehensive and collision insurance.
• 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 military, veterans and their immediate families. USAA offers Car Replacement Assistance, which includes an extra 20% above the vehicle’s actual cash value if it is totaled.
• Travelers: Travelers offers loan/lease gap coverage which pays out the difference between the current value of your car versus what is owed.
• The Hartford: The Hartford offers gap insurance for new vehicles. Drivers must add gap insurance to collision and comprehensive coverage within 30 days of when the vehicle is purchased.
• Liberty Mutual: Under Liberty Mutual’s gap insurance add-on, the coverage will pay the difference if your remaining loan amount is larger than your car’s actual cash value.

Is gap insurance worth it?

Gap insurance is generally 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

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 can 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 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.