Do You Need Gap Insurance For Your Car?


WRITTEN BY: Julia Matseikovich

UPDATED: DECEMBER 23, 2022 | 1 MIN READ

If your vehicle is stolen or totaled, your insurance provider pays out the depreciated value of your vehicle in a claim. The depreciation value is determined at the time of loss, and it might be less than the amount you owe on your car loan. That’s where gap insurance comes in.

GAP or Guaranteed Asset Protection is an option that helps pay the difference between the depreciated value of your vehicle and what you own on your loan or lease so that you’re not stuck with the cost of a car you no longer have.

Do You Need Gap Insurance?

When you finance or lease a car, you may or may not have put down a down payment, so either way, you’re likely making monthly payments. Vehicles start to depreciate the moment they are driven off the car lot. As you pay down your principal, your ownership shares expand while your debt shrinks.

Gap coverage is needed to cover the shortfall, so you’re not on the hook to your lender for the remainder of your loan if your car is a total loss.

Key Things To Know About Gap Insurance

There are things to remember when deciding on whether to purchase gap coverage.

  • Gap coverage pays for the difference between what your car is worth as a loss and what the driver owes on the auto loan or lease.
  • Gap insurance costs between $400 and $700 when purchased from a dealership. It costs between $20 and $40 per year as an addition to your car insurance policy.
  • Drivers should get gap insurance if they lease their car, make a small down payment on their loan, or have a car depreciating quickly.
  • Gap coverage is acquired through a dealership, loan providers, and car insurance providers. Car insurance companies like Progressive, Allstate, and State Farm provide gap coverage.

Pros and cons of gap insurance coverage

Gap insurance offers protection in situations, but it’s an extra cost you must consider. You’re not required to purchase gap coverage, but if you’re considering it, here are a few things to consider:

Pros:

  • You have the option of purchasing a more expensive car with less worry.
  • When you buy gap insurance, it means you walk away from an accident without financial loss.
  • The annual cost is low, quite often $100 or less.

Cons:

  • If you pay a low price, to begin with, it might not be needed.
  • It’s an extra expense you must budget on top of monthly car payments with your car dealer.
  • The difference between your loan balance and the car’s value drops at some point, so that gap coverage isn’t necessary.

Where to Buy Gap Insurance

There are some insurers like Geico that don’t offer gap insurance. Others do offer it but how the protection is provided varies. Here are a few offers to consider:

  • Allstate: Allstate waives the difference between the outstanding balance owed on your loan and the auto insurance settlement. It waives covered losses up to $50,000 and reimburses a deductible payment of up to $1,000.
  • State Farm: They are the largest auto insurer in the US. They don’t offer gap insurance but have Payoff Protector, which helps pay off the difference in your loan balance during your loan term.
  • Progressive: Progressive caps its gap coverage at 25% of the vehicle’s actual cash value.
  • Nationwide: Nationwide provides gap coverage but won’t waive the deductible if you file a claim. Make sure your deductible is low enough to afford if your vehicle is a total loss.

What doesn’t it cover?

When your car is totaled, you make an insurance claim through your comprehensive coverage, and your additional gap coverage kicks in to protect you. Here are some expenses gap insurance doesn’t cover:

  • Extended warranties
  • Security deposits
  • A down payment for a new car
  • Charges for credit insurance connected to the loan
  • Your car insurance deductible
  • Overdue payments and late fees on your loan
  • Carry-over balances from previous loans
  • Lease penalties for high mileage

Is it worth it?

Many people don’t need gap insurance. If you don’t have a lease or loan on your car, then gap insurance would be unnecessary. Even if you have a loan, but it’s paid below the value of the vehicle, you wouldn’t need gap coverage.

However, if you do have a loan on a new car or leasing, you need to consider whether you’re able to afford to pay the remaining loan payments after your car is totaled. If you’re not able to, then gap coverage is for you.

How Much is Gap Insurance?

Gap insurance isn’t as expensive as typical auto insurance. Gap coverage, on average, is $144 yearly. There is a big difference in the price of gap insurance depending on the insurer you choose. Nationwide and Travelers had the best price at $50 annually. That’s 80% less than Erie Insurance or Farmers, which are the two most expensive.

New car replacement coverage

Another option to consider is new car replacement coverage, which replaces your totaled or stolen vehicle with a new vehicle. Your insurer reimburses you enough to replace your old vehicle rather than give you the actual cash value, which uses depreciation. To take advantage of new car replacement coverage, you must meet the mileage and age requirements.

FAQs

What happens if you don’t use gap insurance?

You’re responsible for out-of-pocket costs without gap insurance coverage to settle your auto loan. With gap coverage, your insurer pays the out-of-pocket costs.

What does the gap cover on a car?

Gap coverage helps pay off your auto loan if your car is totaled or stolen.

What is the difference between gap insurance and collision insurance?

Collison and comprehensive coverage pay for the repairs to your vehicle. Guaranteed Asset Protection insurance protects you if you owe more on the vehicle than the amount your insurance coverage pays out.

What is the difference between the car’s value and what you owe?

The actual cash value of your car is the amount your insurance provider pays if your car is stolen or a total loss. The actual cash value is different and is typically much lower than what you paid for the vehicle, according to the Kelley blue book.

What is GAP insurance?

A gap insurance policy or Guaranteed Asset Protection is an option that helps pay the difference between your vehicle’s depreciated value and your loan amount or lease so that you’re not stuck with the cost of a car you no longer have.

What is the difference between a loan and a lease?

A lease is a term rental agreement for using a vehicle over time, and a loan is borrowing money to purchase a car.

What is the average cost of gap insurance?

Gap insurance costs between $400 and $700 when purchased from a dealership. It costs between $20 and $40 per year as an addition to your car insurance policy.

How to Purchase Gap Insurance

Purchasing gap insurance is simple and easy. Ensuring you have the right type of coverage in case you have a totaled car. We hope this article has helped you understand your options and how to deal with theft if it happens to you.

If you’re going to get insurance quotes for gap coverage, it’s as simple as comparing rates as amounts vary by company. We have a helpful tool to find the best gap insurance options.