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Joanna Johnson

Car Insurance Expert
Updated: 1/2019

Joanna is an expert on understanding how the different laws and regulations in the car insurance industry shape the way that policies work.

When financing an automobile, a major problem involves depreciation. Your new ride can lose up to 10% of its value the minute you drive it off the lot. Chances are you financed your car based upon its selling price, meaning you are already upside down on your loan. And that does not even account for the amount of interest that will be added over the life of it.

From there, the problem only becomes worse. Your car continues to depreciate in value each year, (although not as quickly as in the beginning), and there is seemingly no way to recover. The problem is universal as many financial experts agree that the average consumer owes way more on his or her loan than what the vehicle is worth.

Another factor that contributes to people becoming upside down on their loan involves rolling in fees such as the sales tax or licensing and registration fees. Not only are these fees non-recoverable, but you will also have to pay interest on any amount you borrow as well.

What happens if you are involved in an accident and total your automobile? Since the insurance will only pay you the value of your vehicle (minus any deductibles), you could wind up owing thousands of dollars even after everything is settled. That’s where gap insurance comes in, paying you the difference so you do not have to struggle with unpaid balances.

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What is Gap Insurance?

Gap insurance provides the “gap” between what an insurance company pays out after a total loss and the amount of money remaining on your car note. As such, it has no established value because the “gap” amount will fluctuate as your loan progresses.

For example, you may be further upside down during the early stages of your loan because your car depreciates more in the beginning. As time goes on, your vehicle will depreciate at a slower rate, and you have also paid greater chunks of interest. Therefore, the gap amount will be lower if you are near the end of your loan.

Either way, a gap insurance policy can provide you with peace of mind should you be involved in an automobile accident. It can also eliminate the possibility that you will be stuck paying thousands of dollars on a loan and still wind up with no vehicle. Should that happen, you may have a very hard time buying another one to replace it. You could even need to file bankruptcy, which is something that could negatively affect your credit score for years to come.

How Does Car Gap Insurance Work: Is it Worth it?

Do I Need Gap Insurance?

Gap insurance can provide additional protection in the event of a loss. Even so, not everyone needs a gap policy. If you financed for only a very short period or placed a significant down payment on your auto, the gap amount may be very small anyway. In those instances, buying gap insurance may not make sense.

For many people, gap insurance is a good idea. Here are a few times when you may want to consider a policy:

  • If you put more than the national average of 15,000 miles per year on your auto. An excessive amount of miles on your car will cause it to depreciate faster than normal, thereby increasing the gap amount.
  • When rolling another auto loan into a new one. If you have rolled over a balance, you are already further upside down than the average consumer and will therefore require the additional protection.
  • After signing with a lender whose terms and conditions require a policy. Many borrowers default on their loans after experiencing a total loss that leaves them with an unpaid balance. Accordingly, many financial institutions wish to protect themselves by requiring applicants to take out gap insurance.
  • If you are purchasing a vehicle with a higher-than-average rate of depreciation. The same is true if your automobile is among those most often stolen.
  • When multiple people in the same household share a single vehicle. In that case, the livelihoods of more than one individual could be in jeopardy if your family was left without an automobile.
  • While signing a vehicle lease, the issue of gap insurance may come up. Most leasing contracts will require such as policy.

When is Gap Insurance not Needed?

As mentioned, there may be times when buying gap insurance is not necessarily a good idea. A few of those times include:

  • On occasions when the car’s value is far less than the loan amount, including interest. Maybe you are buying an automobile from a friend or relative and they gave you a sweet deal. In that instance, you would not need gap insurance.
  • When the loan is only for a very short period such as less than one year. The odds that your vehicle will be totaled are much less when the term is only for a little while.
  • Having enough in savings to cover any remaining balance if your car is a total loss, or owning assets that could easily be liquidated to account for the loss.
  • If you would be able to continue making payments as usual and doing so would not hamper your ability to purchase another automobile, you likely do not need gap insurance.
  • When you have a second vehicle you could rely on or could otherwise do without an automobile, you may want to think twice about purchasing a gap policy. It may be easier to do without a car for a little while rather than shelling out the money for a gap insurance policy.

Weigh your Options Carefully

When deciding whether or not you need gap insurance, take your financial situation into account. Would you be comfortable paying off the remaining balance if your vehicle was totaled? Would you be okay if that same thing happened two or three years from now? Unless you can comfortably answer “yes” to those questions, consider protecting yourself by taking out a gap insurance policy.

Think about what will happen if you were suddenly faced with the prospect of paying off your loan. Most insurance coverages are simply insufficient, and could leave you owning thousands of dollars out of your own pocket. If you are willing to take on that risk, you should carefully consider a gap insurance policy.

What Does Gap Insurance Cover?

Gap insurance is designed to protect you in the event your vehicle becomes a total loss. This can be through an automobile accident or in cases of theft when the car is not recovered. You cannot use gap insurance to cover minor accidents or to offset the cost of any deductibles.

This insurance does not cover mechanical failures that would cause you to scrap your auto. For example, major engine or transmission repairs can sometimes exceed the fair market value of an automobile. To avoid a large mechanic’s bill, always perform maintenance on time and consider taking out an extended warranty to cover unexpected repairs.

A gap policy also will not pay off your loan in the event of your death. An exception would be if you perish in an automobile accident that also resulted in your car being a total loss.

Gap payments are made regardless of whether or not you are at fault in a collision. This is good news, because you do not have to worry about proving your case one way or another.

Figuring the Cost of Gap Coverage

The primary factor in determining cost is the price of your vehicle. You’ll pay more for gap coverage if you are purchasing a $30,000 dollar automobile than you would when buying one for $15,000. That’s because the amount of negative equity will only increase with your loan amount.

Gap policies are not based on age, gender, or driving record. This means you do not have to worry about previous tickets or accidents that might negatively affect other forms of insurance. You will also not pay more just because you are in an “at risk” category for having an automobile accident.

Your decision to purchase gap insurance will have no bearing on your regular insurance policy. As such, you will not notice any change in your normal rates as a result. The only additional expense will be for the gap insurance itself should you choose to have the cost added onto your existing policy.

How Do I Purchase Gap Insurance?

So you have weighed all your options and have decided that gap insurance is right for you. How do you go about taking out a policy? There are several methods, but buying from an insurance agent is typically the best choice.

The car dealership may offer you a gap insurance policy as part of closing the sale. Keep in mind that this is just another product dealerships use to turn a profit. Car dealers often charge three or four times the amount you would pay when buying gap insurance from an agent. Many people are in a hurry to sign their paperwork and will not take the time to compare rates.

To ensure you do not succumb to pressure, ask for a quote from your agent beforehand. When armed with this knowledge, you are in a better position to negotiate with (or walk away from) a sales manager. What’s more, by going through an agent you can typically add the fee to your regular policy. This helps you avoid having to roll the cost of the gap insurance policy into your loan.

Loan companies may sometimes offer gap insurance as well. In doing so, their primary focus is on protecting their own interests. Gap policies written by lending institutions may have hidden clauses that would limit the amount of your payout, so be sure to read the fine print very carefully.

When Should I ask for a Refund?

Normally, it is not possible to cancel a gap insurance policy. However, there are certain times when you would be entitled to a refund of the pro-rated balance. Here are a few instances:

  • After paying off the loan early. For example, if the loan term was five years and you pay the note off in four, you would be entitled to 1/5 of the original amount.
  • When you sell or trade your vehicle before paying it off. You no longer need gap insurance on a vehicle you no longer own, and most policies are non-transferrable.
  • Market conditions cause the value of used cars to skyrocket. This can happen if used cars suddenly become a commodity as was the case during the “cash for clunkers” program a few years back.

Actions when Refinancing a Loan

What happens if you refinance your vehicle before the note expires? If you initially rolled in the cost of gap insurance, you should ask for a refund. Your gap policy would no longer be effective since it was tied to the original car loan. You would then need a new policy to ensure continuous coverage. Your new coverage should be far less because your vehicle’s fair market value has now decreased.

Is Gap Insurance Worth it or Not?

Is a gap policy the best option under every circumstance? No, but there are times when buying a gap insurance policy makes perfect sense. Other times, this type of insurance might be an unnecessary expense that you would be better off doing without. Compare rates carefully and read all the terms thoroughly before signing and gap coverage can provide you with tremendous peace of mind.

FAQ

General Gap Insurance Questions

This section will help you understand the basics of gap insurance. 

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What is gap insurance?

Gap insurance is a financial product that pays the difference between what you owe on a car and what your primary insurance pays out if the car is totaled.

How does gap insurance work?

If your car gets totaled in an accident, then gap insurance covers the difference between your remaining loan balance and your primary insurance payout.

What does gap insurance cover?

Gap insurance covers your car in the event of a total loss. It pays out the difference between your outstanding auto loan balance and your insurance company’s payout.

Is gap insurance worth it?

For some people. If you buy a car that is going to depreciate quickly, then gap insurance is a good way to ensure you’re not stuck paying a car loan for a car you no longer have.

How much is gap insurance?

That depends on lots of different things, like your type of car, driving record, and so on. You should talk to your dealer, car insurance company, and other insurance companies to get prices for your situation.

Where to buy gap insurance?

You can usually by gap insurance from the dealership where you purchased your car. You can also check with your primary insurance company to see if they offer gap insurance.

How do I know if I have gap insurance?

The first thing you should do to know if you have gap insurance is to check your bills. After that, call the dealership where you bought the car to see if you have a policy with the dealer.

Do I need gap insurance?

In most cases there’s no legal requirement to have gap insurance. However, it’s a good idea for people that buy a car which will quickly lose market value.

How long does it take for gap insurance to pay?

That depends on the nature of your claim, your gap insurance company, and other factors. You’ll need to contact your insurance provider for more information.

Should I get gap insurance?

If your car is going to lose value very quickly once you buy it, then gap insurance is probably a good idea. Otherwise, many people don’t need it.

How long does gap insurance last?

Gap insurance usually last until you pay off your car. After that, there’s no need for the gap insurance product.

Who offers gap insurance?

You can get gap insurance from most dealerships, so ask the dealer you’re buying your car from. You can also check with local insurance companies to see if they have a gap insurance policy for you.

Is gap insurance good?

For some situations, yes. For example, if you buy a brand new car for $60,000, and it depreciates to $40,000 the next year, then you’ll want gap insurance to cover the difference between the value of the car and what you owe.

Do i need gap insurance if I have full coverage?

That depends on your car. If your car’s value is substantially less than what you owe on it, then gap insurance might be a good idea. Remember, full coverage pays out the value of the car, not the cost of your loan.

Can you buy gap insurance at any time?

That depends on state laws and company policy. Most insurance companies that offer gap insurance will sell it to you as long as you have a car loan.

What is gap insurance on a car loan?

Gap insurance on a car loan covers the difference between the damages that your primary insurance company pays for your totaled car and what you owe on your car loan balance.

How to file gap insurance claim?

You’ll need to contact your gap insurance provider to find out what their process is for filing a claim.

Gap Insurance Coverage

We’ll answer your questions about what gap insurance covers in this section.

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Does gap insurance cover theft?

That depends on your specific policy. Some policies may cover theft, but many of them only cover total loss in an accident.

How does gap insurance work after a car is totaled?

Gap insurance will cut you or your auto loan servicer a check for the difference between your primary insurance damages and what you owe on the car.

Can gap insurance deny claim?

Yes – you should check the terms of your gap insurance policy closely to make sure you know what’s covered and what isn’t.

Does gap insurance cover engine failure?

Not usually. Gap insurance is designed to cover the difference between your primary insurance payout and what you owe on a car in the event of a total loss in an accident.

Will gap insurance cover totaled car with no insurance?

No. Gap insurance requires you to have a primary insurance carrier. It only covers the difference between what you owe and what your insurance pays out on your totaled car.

Does gap insurance cover death?

No. Your primary insurance is responsible for death and injury. Gap insurance just fills the gap between what your car is worth and what you owe on it if you’re in an accident.

Does gap insurance cover trade in?

No. Gap insurance only kicks in for an accident that totals your car when you owe more than the car is worth on your loan.

How does gap insurance work after a car is stolen?

That depends on the specific nature of your gap insurance policy. You’ll need to check with your policy holder for more information.

Does gap insurance cover repossession?

No – Gap insurance only covers the difference between your insurance payout and what you owe on your loan in the event of a crash.

Gap Insurance Refunds

This section covers questions about gap insurance refunds.

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How does gap insurance refund work?

You can get a gap insurance refund if you pay the entire gap premium in advance and then pay off your car early. This will produce a refund for the unused gap insurance.

How do I get my gap insurance money back?

You can get your gap insurance money back by paying off your car early and paying your gap insurance premium up front. This will generate a refund for the time that you paid for gap insurance but didn’t need it.

Gap Insurance and Specific States

Find out about state laws relating to gap insurance in this section.

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Is gap insurance required in California?

No, the state of California doesn’t require you to purchase gap insurance on financed vehicles.

Is gap insurance mandatory in NY?

New York law doesn’t mandate that you have gap insurance for your vehicle. However, your financing or lease agreement can still require you to have gap insurance.

What does gap insurance cover in Texas?

In Texas, gap insurance covers the difference between what you owe on your car loan and how much money your primary insurance company awards you when your car is totaled.

How does gap insurance work in Florida?

Gap insurance in Florida works the same was as gap insurance in other states. If you have a gap insurance policy, then the policy will pay the difference between what you owe on your car and what your primary insurance pays out.

Gap Insurance and Specific Companies

This section will help you understand what companies offer gap insurance.

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Does Geico offer gap insurance?

Geico does not currently offer gap insurance. You should check with your dealer for suggestions.

Does State Farm offer gap insurance?

State Farm offers Payoff Protector, which is a similar product to gap insurance.

Does Progressive offer gap insurance?

Yes, you can buy a gap insurance policy from Progressive. It will cover up to 25% of your car’s value.

Does Allstate offer gap insurance?

Yes, you can get gap insurance from Allstate. You can get it separately or as part of your primary insurance policy.

Does USAA offer gap insurance?

USAA does not currently offer gap insurance, so you should check with the dealership or other insurance companies.

Can I buy gap insurance from State Farm?

State Farm has a product that’s similar to gap insurance called Payoff Protector. They advertise this product as a replacement for traditional gap insurance.

What does Toyota gap insurance cover?

Toyota gap insurance pays the difference between what you still owe on your car and what your insurance pays out, minus specific fees and charges.

Gap Insurance and Leased Cars

We’ll cover your questions dealing with gap insurance and leased cars in this section.

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Does Lexus lease include gap insurance?

Lexus leases include something called a deficiency balance waiver, which eliminates the need for gap insurance.

Does BMW lease include gap insurance?

BMW leases do include gap coverage, so there’s no need to buy an additional policy.

Do Honda leases have gap insurance?

Yes, automatic gap insurance is standard for all Honda lease agreements.

Do Audi leases include gap insurance?

Yes, gap insurance is a standard part of every Audi Financial Services lease.

What does gap insurance cover on a lease?

Gap insurance on a lease covers the difference between your obligation to the dealership you’re leasing from and the payment your primary insurance company provides when the car is totaled.

Other Gap Insurance Questions

This section covers the questions people have about gap insurance which don’t fit into other categories.

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Is gap insurance necessary?

It’s not necessary, but there are lots of situations where it’s a good idea. It’s an especially good idea if you’re buying a brand new car that will depreciate quickly.

How to cancel gap insurance?

You’ll need to contact your insurance provider to see how you can cancel your gap insurance coverage.

Can I cancel gap insurance from dealer?

That depends on your situation. Sometimes gap insurance is required as part of the financing. Check with your dealer for more information.

When does gap insurance not pay?

Gap insurance doesn’t pay when the car isn’t considered a total loss. It also doesn’t pay if the value of your loan is covered in full by the insurance payout.

How to use gap insurance?

If you’re in an accident and your insurance payout doesn’t cover what you owe on your loan, then you contact your gap insurance provider to file a claim for the difference.

Is it too late to get gap insurance?

That depends on how late it is. You certainly can’t get gap insurance after your car has already been totaled by your primary insurance company.

How to claim your gap insurance?

You can claim your gap insurance by contacting your insurance provider, either an insurance company or the dealership, and following their claims process.

Should you get gap insurance on a used car?

Many people don’t, but it depends on how much the car will depreciate after you purchase it. If the car will still lose a good amount of value, then gap insurance may be worth it.

How much is gap insurance a month?

That depends on lots of different factors, including what kind of car you have, the expected difference between the insurance payout and what you owe, and so on. You’ll have to talk to specific companies to get prices.