Gap Insurance Coverage for Car: How it works & What it covers?

By Randy Luton | Last Updated: 04/24/2024

Key Insights:

  • Car Gap insurance is required only when the loan or lease amount on your car is greater than the value of your car.
  • Gap insurance coverage for cars is mandatory for every driver who has bought a car on loan or lease.
  • There are no benefits of keeping the gap insurance forever. You can drop the policy when the value of your car starts decreasing.
  • The company where you owe the loan or lease money can be different from your car insurance company to avail the benefits of lease car gap insurance.
  • If you don’t have a loan or lease on your car then you don’t need gap insurance.

We all know that purchasing a brand new car is not affordable for everyone and hence we rely on loans or leasing. But in case your car is stolen or gets into an accident then the pending loan or lease amount has to be paid from your pocket.

Gap insurance plays an important role if your car gets totaled in an accident or gets stolen. In these situations the insurance company pays as per the actual cash value of the vehicle. But for vehicles that are on loan or lease actual cash value is far less than the amount to be paid to the company. Hence the driver has to pay from his or her pocket.

With Gap insurance, your insurance company will pay the remaining amount on your loan or lease. There is a lot of confusion and misunderstandings around the term “gap” insurance. RateForce has written this blog with the objective to help all the drivers understand the importance and benefits of this car insurance type

Let’s start with a quick introduction:

What is Gap Car Insurance?

Gap insurance is an optional car insurance coverage that drivers opt for as an add-on policy to save their bank balance at the time of road accidents. Basically, it covers the “gap” between the actual cash value and the amount owed on your vehicle in case it is completely destroyed or stolen after an accident.

Here is an example;

Let’s say you bought a brand new Honda in 2019 at $30,000, in 2020 you met with an accident, and the car gets totaled. Now the actual cash value of your car is $18,000 and the amount of loan pending on your car is $25,000 then you will have to pay $7000 from your pocket.

What is the Cost to Buy Gap Car Insurance Coverage?

Wondering how much is gap insurance? The average cost of gap insurance is not that high as compared to other types of car insurance coverage. A driver has to pay $400 to $700 one time and $25 every year to the car insurance company for the renewal of the policy.

There are a lot of factors that affect any type of car insurance coverage. The same goes for gap insurance. No two drivers can get similar costs for gap insurance in some cases the cost can vary by a couple of dollars and in some cases, it can be in hundreds.

Below are some factors that affect the cost of car gap insurance:

  • The age of the driver
  • The age of the car
  • Type and model of car
  • Value of the car during purchase time
  • Condition of the car

How Does Gap Insurance Work?

Gap insurance comes into the picture after an accident when your car is at a complete loss. Some car insurance covers the basic repair or replacement of the car but that depends on the value of the car.

The amount of claim you will receive is directly proportional to the value of your car. If your car is new then the value of your car will be higher hence you can use your car insurance coverage to get a high claim amount. But if the value of your car is low and the amount of loan on your car is high then gap insurance will play an important role.

Your car insurance company will check the value of your car and then the loan/ lease amount on the car. Based on the difference between the actual cost value of the car, the loan amount, and the deductibles you will get your gap insurance claim.

Let’s consider this with an example when you have Gap Insurance coverage;

If your new car gets stolen that has a value of $40,000 approx. and the loan on your car is $25,000. Now your car insurance company will check the deductible, let’s say the deductible cost is $1500. The amount you will receive from the claim is $13500.

You can refer to the below table to understand the example in a better way:

Terms of Car Insurance Coverage Amount
Loan or Lease to be paid$40,000
Actual Cost Value of the car$25,000
Deductible Amount$1,500
Comprehensive insurance amount$23,500
Difference between the actual cost value of your car (minus deductible) and your loan balance$13,500
Amount to be paid by the driver with gap coverage$0
Amount to be paid by the driver without gap coverage$13,500

Which Insurance Companies Provide Gap Insurance Coverage?

There are some top car insurance companies that do not provide gap insurance coverage like GEICO. On the other hand, there are some companies that provide gap insurance at affordable rates:

  1. AAA: Drivers that have full coverage insurance including collision and comprehensive can get gap insurance with the American Automobile Association company. You can get up to $1000 of deductible in case of total loss.
  2. Allstate: The company provides a gap program that covers the difference between the outstanding balance of loan or lease of your car and the car insurance settlement amount. The driver can get up to $50,000 for the losses along with the deductible payment reimbursement.
  3. State Farm: This company does not offer gap insurance directly but there is a feature called payoff protector. Any driver with a car loan from a state bank can apply for this feature. In some cases even if the insurance is from any other company, if you have the loan from State Farm then also you can get the benefit of payoff protector.
  4. Nationwide: The driver can get gap insurance but the deductibles are not covered in the policy. If your deductibles are low or affordable then only opt for this company’s gap insurance.
  5. USAA: This company’s gap insurance is specifically available for active and former military personnel along with their family. If your vehicle is less than 7 years old then you can get a car loan of $5,000 and deductible reimbursement of up to $1000.
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Do We Really Need Gap Insurance Coverage?

The most common question asked about this insurance is if gap insurance is worth it or not. We need gap insurance for the following scenarios:

  • If the down payment of your loan is less than 20%.
  • If the loan on your car has a high interest rate. In such cases, the principal amount takes more time to pay off.
  • The loan term is more than 5 years.
  • If you want protection from depreciation.

Please note that the gap amount fluctuates with time as your loan will pay off the amount will decrease. Hence it is also important to keep in mind the time period when you actually need gap insurance.

It is not mandatory for every driver to buy this insurance type; there are also some situations where gap insurance is useless. Below are some cases where gap insurance is not required:

  1. If you have made a large down payment of your car loan
  2. If the time period of your loan is short (less than 3 years)

Do We Need Gap Insurance On Leased Cars?

Buying gap insurance can be a smart decision for leased cars as these cars depreciate quickly. In case of an accident, you will more likely owe more than the value of the vehicle. Just like any other type of car insurance you don’t need gap insurance for a leased car throughout the leasing term.

With time the lease amount will start decreasing as you will make monthly payments. Hence after some time, the gap between the value of the car and the payment pending will vanish. You will have to buy gap insurance on leased cars for the first few years of purchase.

What Does Gap Insurance Cover?

Wondering what will be covered in your gap insurance policy? The gap insurance policy covers stealing, accidents, natural and manmade calamities. Below are some example cases where gap insurance is applicable with comprehensive and collision coverage:

  • Theft: If your vehicle is stolen and not recovered, gap insurance can cover the difference between the actual cash value of your car (what your primary insurance pays) and the amount you owe on your loan or lease.
  • Hurricane: In case your vehicle is damaged due to a hurricane, and your primary insurance doesn’t cover the full cost of repairs or replacement, gap insurance can bridge the gap by covering the remaining amount you owe.
  • Tornado: Similar to hurricane coverage, if your car is damaged or destroyed by a tornado and your primary insurance falls short in covering the total expenses, gap insurance can step in to cover the shortfall.
  • Vandalism: If your vehicle is maliciously vandalized, and your primary insurance coverage isn’t enough to cover the damages entirely, gap insurance can help cover the outstanding balance between what your insurance pays and what you owe.
  • Terrorism: In the unfortunate event of your car being damaged or destroyed due to an act of terrorism, and your primary insurance doesn’t cover all the costs, gap insurance can fill the gap and cover the remaining balance.
  • Flood: If your vehicle sustains flood damage and your primary insurance doesn’t cover the full cost of repairs or replacement, gap insurance can cover the difference to ensure you’re not left with additional expenses.

What Gap Insurance Does Not Cover?

Gap insurance helps when you owe more money on your car loan or lease than the car is actually worth. In simple terms, it covers the “gap” between what you owe and what the insurance would pay if your car were totaled or stolen. However, gap insurance doesn’t cover other things like injuries, repairs to your car, getting a new car, or damage to someone else’s vehicle.

It also doesn’t cover negative equity from a previous loan, optional products like extended warranties, or extra charges from your loan or lease agreement. Just remember, you only get a payout from gap insurance if you owe more than your car is worth.

Alternative Insurance Types To Gap Insurance

There are some other types of insurance that can help you to cover the cost in case of a total loss:

  1. Better Car Replacement Coverage
    Gap insurance is generally for new cars and insurance companies avoid gap insurance for drivers with old cars and suggests better car replacement coverage.
  2. Loan/Lease Payoff
    There is a lot of confusion and misunderstandings with loan/lease payoff and gap insurance. Loan/lease payoff is for old cars and gap insurance is for new cars. Moreover; this coverage works on a set percentage of your car value instead of the debt balance.
  3. New Car Replacement Coverage
    This is for the drivers who prefer buying a new car after the complete loss of an old one. It has nothing for the payment of your loan/lease debt in this coverage.

How Long Does It Take for Gap Insurance to Pay?

Most insurance companies will process a payment within 30 to 45 days after you file a claim. It’s important to know that gap insurance only kicks in after the rest of your claim is settled. It covers the difference between what you got for the damage and what you still owe on your loan or lease.

Different states have different rules. For instance, in Texas, insurers have to make payments within five days after agreeing to cover the damage. This means the time it takes for gap insurance to pay out can vary depending on state laws and how complex your claim is.

How To Buy Gap Insurance Coverage?

The most common way to buy gap insurance is when you purchase the car from the dealer. The finance person at the car showroom will guide you about the gap insurance. Make sure to pay it upfront if you decide to buy from the car seller because you might get interested in the monthly payment model.

Moreover; gap insurance can be bought anytime from any car insurance company. You can ask your present company to add this coverage into your existing policy and the cost of adding it will be between $20 to $50 depending on the type of your car and the age of the car.

If you decide to buy this coverage from a third-party company then you will have to inform your insurance company about it.

FAQs about Gap Insurance Coverage

  • What’s the point of gap insurance?

    Even though gap insurance is optional it can save a lot of your time and money in case you get caught in an accident. The entire point behind buying this insurance is to save ourselves from extra expenses after an accident.

  • How long is gap coverage good for?

    This insurance coverage is good for one to two years maximum or until the loan or lease value of the car is completely paid off. If the car’s value is more than the loan or lease balance then gap insurance is of no value.

  • Does gap insurance help you get another car?

    You will have to add a new car replacement coverage to your gap insurance policy. New car replacement coverage will help the driver to get another car after an accident.

  • Does gap insurance work if the car is stolen?

    After it is proved that the vehicle is stolen the auto insurance company will declare a total loss. Even if the vehicle is recovered but it is damaged by thieves then also it will be declared as a total loss.

  • What happens if a financed car with gap insurance gets totaled?

    In such cases, the insurance company will check the worth or actual cash value of the car, and then it will be compared with the amount you owe on your car. If the amount you owe is more than the ACV of your car then gap insurance will cover the difference.

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Editorial Guidelines: The above is meant as general information to help you understand the different aspects of auto insurance. This information does not refer to any specific auto insurance policy. Coverages and other features vary between insurers, vary by state, and are not available in all states. References to costs of coverages/repair, average or typical premiums, amounts of losses, deductibles, etc., are indicative and may not apply to your situation. We encourage you to speak to our insurance representative and to read your policy contract to fully understand your coverages.

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Randy Luton is the Founder and CEO of RateForce. He is passionate about InsurTech services and has in-depth knowledge about the auto insurance sector of the USA.