What Is Gap Insurance and What Does It Cover?

Gap insurance comes into play when your car is totaled or stolen, and you owe more on it than its current value. Unlike standard auto insurance, which only covers your car's current value, gap insurance covers the extra amount you owe. It fills in this financial "gap," ensuring you're not stuck paying off a loan for a car you no longer have.

Gap insurance is an add-on to your regular auto insurance, not a replacement for it. So, it works alongside your standard coverage to give you full financial protection in specific situations.

Gap insurance, which stands for Guaranteed Asset Protection, is a type of auto insurance coverage designed to financially protect drivers if their car is totaled or stolen and they owe more on the loan than the car's current market value.

In such situations, gap insurance covers the difference, or "gap," between the two amounts. This ensures that you're not left with the financial burden of paying off a loan for a car you no longer have. Gap insurance is not a standard part of auto insurance — it's typically an additional coverage option that can be stacked on top of collision and comprehensive insurance within a full coverage car insurance policy.

This coverage type is usually only required by lenders or lessors. You do not need gap insurance if you own your car outright. The "gap" potentially exists between the loan amount and the car's current market value, so if you've bought your car without a loan or lease, there's no gap to worry about.

Illustrating Gap Insurance: Hypothetical Depreciation vs. Loan Balance

The graph above shows how gap insurance works with two different cars:

• Ford F-150
• Honda Civic

When you own a car, it's not just the initial cost that matters. As time goes by, your car's value decreases, but your loan balance often remains high. That mismatch can spell trouble if your car is in an accident or stolen, especially in the first few years of ownership. Your insurance payout might fall short of your outstanding balance, leaving you responsible for the difference, which can be substantial.

Gap insurance is your financial safety net, bridging the gap between your car's value and your remaining loan balance. If you ever find yourself "upside-down" on your loan and facing a car-related crisis, gap insurance steps in to save the day. Remember that the benefit goes to your financing company, ensuring your loan or lease is paid off so you can focus on getting back on the road without a heavy financial burden.

Gap insurance is especially useful for drivers who have recently financed a new car, have a long-term loan or have made a small down payment:

You may want to skip the gap coverage if:

• You made a big down payment
• Your car loan term is 36 months or less
• You’re paying the loan down ahead of schedule
• You can easily afford the risk and would rather invest the money

However, keep in mind that you can only skip on this coverage if your lessor or lender does not require you to carry gap insurance.

A general formula to understand how gap insurance works could look like this:

Gap Insurance Coverage = Amount Owed on Loan or Lease - Car’s Current Market Value

• Amount Owed on Loan or Lease: This is the remaining balance that you owe to the lender or leasing company for your car.
• Car's Current Market Value: This is how much your car is worth at the time it is totaled or stolen. This value is usually determined by the insurance company and is based on various factors like age, mileage and condition of the car.

When your car is totaled or stolen, your primary insurance (either collision or comprehensive, depending on the situation) will typically pay you the car's current market value. However, if you owe more on your loan or lease than that amount, you're left with a "gap" that you're still responsible for.

Standard auto insurance policies, like comprehensive and collision, cover your car's actual cash value (ACV), not what you originally paid for it. If your car is totaled or stolen, these policies will pay for repairs or a replacement based on its current value minus your car insurance deductible. For instance, if your car's current value is $4,000 and you have a $500 deductible, you'll get a payout of $3,500.

Gap insurance, on the other hand, fills in a specific financial gap. It won't pay for repairs or a new car; it simply covers the difference between your loan balance and the car's market value.

Below are three scenarios to illustrate how gap insurance works — all of these scenarios assume policies with no deductible.

Gap insurance only comes into play if your car is a total loss and you owe more on your loan than the car's current value. It won't help if your car isn't totaled or if you owe less than the car's worth.

Not all cars are eligible for gap insurance with every carrier. For example, high-end luxury or sports cars might not be covered. Also, the type of loan you have can affect your eligibility. Some carriers won't cover cars with specific loan types, like those with balloon payments or loans longer than 72 months.

You can get gap insurance coverage from your dealer or lender, a specialty carrier or from a third-party insurance provider.

Dealer-sold gap insurance is almost always the most expensive option, by far. Buying gap insurance from your own insurance carrier has the advantage of a lower premium. Plus, since you’re paying monthly, you can cancel the coverage as soon as you’re no longer upside down on your loan. You may not have this option with lump-sum policies, especially when the premium has been rolled into your loan.

Find answers to frequently asked questions about gap insurance and learn how this financial safety net can bridge the gap between your car's value and your loan balance, providing peace of mind in unexpected situations.