Imagine this scenario: You take out an auto loan to buy a new car, only to get in an accident that leaves your car totaled a year or two later. If you didn’t spring for guaranteed asset protection, or “gap” insurance, you’d end up owing money on a car you can no longer drive.
In this article, we’ll take a look at how gap insurance works, explain when it may be a good investment, and give our recommendations for the best car insurance companies that offer gap coverage.
If you’re shopping for car insurance and want to find the best rates, we recommend you compare free quotes from top providers.
How Does Gap Insurance Work?
ap insurance covers the difference between the value of a car when it’s totaled or stolen and what is owed on a car loan. It kicks in when you fill out a total loss claim and is usually considered an add-on feature you purchase in addition to liability coverage and collision or comprehensive car insurance.
In the event of a total loss, an insurer will reimburse your car’s actual cash value, or ACV. If the remaining balance on an existing car loan is greater than the ACV, gap coverage takes care of the remaining amount.
Here’s an example: You’re financing a vehicle and have an outstanding loan balance of $12,000. You’re involved in a collision, and the car is declared a total loss. Since you have collision insurance, the auto insurer determines the value of your car to be $9,000 minus your deductible and writes you a check for that amount. A gap insurance policy will cover the $3,000 left on your loan amount.
What’s Not Covered?
Even if you add gap coverage to your car insurance policy, the scope of the policy is pretty limited. This special type of car insurance coverage only kicks in if your car has been stolen or declared a total loss.
Here are some situations where gap insurance would not apply:
- Damage from a car accident: Gap insurance only comes into play if a vehicle is declared a total loss or stolen. Damage that still leaves your car operable will be paid out of either your collision coverage or comprehensive insurance.
- Covering your deductible: Even if your vehicle is totaled or stolen, you’re still responsible for paying your insurance deductible.
- Medical bills: Gap insurance doesn’t cover bodily injury or death. The bodily injury portion of your liability coverage and personal injury protection (PIP) pays for medical bills from an accident.
- Property damage: Property liability insurance handles damage to someone else’s property, which gap insurance won’t cover no matter how much damage you cause.
- Vehicle depreciation: Getting into an accident that doesn’t total your car will keep your vehicle on the road, but it will further depreciate the value of the vehicle. That means a lower ACV and smaller reimbursement.
When Should You Get Gap Insurance?
If you’re not leasing or financing a vehicle, then you likely don’t need gap coverage. If you are financing a vehicle, gap insurance coverage could be worth the investment depending on how much you drive, how much you owe, and the stability of your car’s value.
Here are a few situations where you should or should not consider gap insurance:
|You Should Consider Gap Insurance If...||You Should Skip Gap Insurance If...|
|You’re leasing a car for more than 48 months||You purchased your car outright|
|Your car has a fast depreciation rate||Your car depreciates slowly|
|You drive many miles per year, leading to quicker depreciation||You don’t drive too much, keeping your car’s value higher for longer|
|You made a low or $0 down payment on a car loan||You made a large down payment and will pay off your loan quickly|
It’s worth noting the value of a car can depreciate quickly. The Insurance Information Institute (III) estimates most vehicles lose 20 percent of their value within a year. This means the balance on a car loan can eventually outpace the value of your car, especially if you choose not to make a large down payment.
When financing a car, car dealers will typically give you the chance to buy gap coverage on the spot. Depending on your standard car insurance provider, you may also be able to add gap coverage to your full coverage auto insurance policy. However, this typically must be done while your vehicle is less than three model years old.
So, is gap insurance worth the money? Here are a few steps to take that’ll help you decide:
- Use a tool such as Kelley Blue Book to estimate the value of the vehicle. You’ll want to check your car’s value for each year of ownership until your auto loan is paid off.
- Calculate your remaining monthly payments after each year of ownership, and compare them against your car’s estimated value at the time.
- Add up how much you will pay in gap coverage until you liquidate your loan, and determine whether it’s less than you would have to pay out-of-pocket to cover your car loan if you didn’t have gap coverage.
How Much Does Gap Insurance Cost?
Rates for gap coverage vary widely depending on whether you purchase through a car dealership or your standard insurer. If you buy a policy through an auto insurance company, you can expect to see a few dollars more on your monthly payment – usually between $20 and $60 per year.
The cost of optional coverage such as gap coverage will depend on the value of the car. Keep in mind that some insurers won’t allow you to purchase gap coverage unless you have full coverage auto insurance, which includes comprehensive and collision coverage as well as your state’s required liability insurance.
While it’s generally cheap through an insurer, buying gap insurance from a lender or car dealership could cost you hundreds of dollars. According to nonprofit consumer group United Policyholders, a lender could charge between $500 and $700. Financing a car and purchasing gap insurance through a credit union could be cheaper, but rolling the cost of coverage into your loan means you’ll be paying interest on it.
Alternatives To Gap Coverage
While gap insurance is one way to protect your finances in the event of a total loss, there are some other options you may come across. These include new car replacement coverage and loan/lease payoff.
New Car Replacement
This type of policy is best for drivers who are more focused on getting their car replaced rather than paying it off. In a total-loss situation, new car replacement insurance will help you pay for a replacement vehicle that’s the same make and model as your totaled car. Typically, you’ll have to pay a deductible before your coverage kicks in.
Keep in mind that new car replacement insurance is usually only offered for newer cars with low mileage, and some insurers may only offer this instead of gap insurance.
Some insurers use the terms loan/lease payoff and gap insurance interchangeably, but there are a few differences between the two types of policies.
Gap insurance is generally reserved for new vehicles, but loan/lease payoff coverage may be an avenue for used cars. This type of policy works by paying a determined percentage of your car’s value – generally 25 percent of the ACV.
So, for example, if the value of the vehicle is $12,000, loan/lease payoff coverage would cover $3,000. There is typically a deductible with loan/lease payoff insurance but check with your insurance provider to make sure.
Our Recommendations For Car Insurance
Since the cost of gap insurance policies can differ by insurance provider, we recommend you look at multiple companies to compare quotes before making a financial commitment. Our team of insurance specialists has researched every major auto policy provider in the U.S. and found that USAA and Progressive are two great options. You can learn more about them below.
USAA: Best For Military
USAA is an excellent option due to its competitive rates and money-saving opportunities such as family, loyalty, and new vehicle discounts. We rate the company 4.8 out of 5.0 stars and aren’t the only ones to applaud its customer service. USAA also earned an A+ rating from the Better Business Bureau (BBB).
The only catch with USAA is that in order to join, you must be a member of the military or have an immediate family member with a USAA membership.
USAA offers both gap insurance and vehicle replacement assistance. You can learn more in our full USAA auto insurance review.
Progressive: Best For High-Risk Drivers
Progressive is another great option offering multiple discounts for policy owners. These discounts are available for drivers who practice safe driving habits and bundle their home and auto insurance policies. Progressive also earned an A+ rating from AM Best.
One of the main reasons we like Progressive is that it offers low rates for high-risk drivers. So if you’re under 25, over 65, or have a DUI/DWI on your driving record, this may be a good place to start shopping for cheap car insurance.
The insurer has both gap coverage and loan/lease payoff options, with the latter costing only $5 per month on average. Read our comprehensive Progressive auto insurance review for more information.
FAQ: Gap Insurance
In an effort to provide accurate and unbiased information to consumers, our expert review team collects data from dozens of auto insurance providers to formulate rankings of the best insurers. Companies receive a score in each of the following categories, as well as an overall weighted score out of 5.0 stars.
- Industry Standing: Insurers with strong financial ratings and customer-first business practices receive the highest scores in this category.
- Availability: We consider availability by state as well as exclusions for specific groups of drivers.
- Coverage: This rating is based on types of insurance available, maximum coverage limits, and add-on policies.
- Cost and Discounts: Our research team reviews auto insurance rate estimates generated by Quadrant Information Services for a variety of drivers in every state. Companies with lower prices and many car insurance discount opportunities receive the best scores.
- Customer Service: We comb through customer reviews and consumer feedback studies from experts like J.D. Power.
- Technology: Auto insurers with mobile apps, advanced online services and telematics are more likely to meet consumer needs.