Your Guide to Gap Insurance
No one wants to be obligated to pay for a vehicle that does not exist. Even if you have comprehensive and collision insurance, this situation can arise if you total a car and its value is less than the balance of your auto loan at the time of the accident. One way to protect yourself is to purchase gap insurance. Learn more about gap insurance and how it works.
What Is Gap Insurance?
Guaranteed asset protection, also known as "gap insurance," is an auto insurance policy that pays the remaining balance on your car loan if it is totaled or stolen. It protects you from having to make loan payments on a car that you no longer own. It's also known as a "gap waiver," "loan assistance coverage," "lease assistance coverage," and other terms.
You may be wondering why you need gap insurance if you have comprehensive and collision insurance, which help pay to replace your car. Insurers typically pay out your car's actual cash value (ACV or fair market value) at the time of the incident, up to the limits of your policy. ACV takes into account depreciation, or the loss of value caused by factors such as your car's age and mileage.
As a result, your insurer's payment may be less than what you owe on your car loan. You would have to pay the difference to your lender out of pocket if you didn't have gap insurance.
How Does Gap Insurance Work?
Cars lose up to 60% of their purchase price in the first five years, and depreciation continues every year after that.
Assume you were in a car accident and your vehicle was declared a total loss. You owe $15,000 on your loan at the time of the accident, but the insurance company determines the fair market value of your car is $5,000. Because your deductible is $1,000, the insurer sends $4,000 to your lender ($5,000 - $1,000). That leaves you with a balance of $11,000 to repay.
You'd have to pay off the rest of the loan if you didn't have gap insurance at the time of the accident. If you had gap coverage, the insurer would first pay you a settlement check for the ACV of the car minus your deductible, which is $4,000 in this case. Then, before sending the final check to your lender, it would total the gap coverage amount required to pay off your auto loan balance. In our case, that is $10,000. Because you are responsible for your $1,000 deductible, the insurer only covers a total of $14,000.
What Gap Insurance Does and Doesn’t Cover
Your car's negative equity is covered by gap insurance. That is the difference between your auto loan balance and the actual cash value of your vehicle. Gap insurance, like other types of insurance, has maximum benefit limits. To make fair comparisons, make sure to check these values when shopping around.
Gap coverage only applies to your car and not to other people or property, and it kicks in when your vehicle is declared a total loss. This usually occurs after a collision or if your vehicle is stolen and not recovered.
Due to these limitations, gap insurance does not cover:
- Extended warranties, loan rollover balances, credit life insurance, and late penalties and fees are all rolled into your loan.
- Injuries, medical bills, funeral expenses, lost wages, and other accident-related costs
- Due to financial hardship, you have fallen behind on your payments.
- Vehicle maintenance
- When you don't have a car, you can rent one.
- A down payment on a new car
What Companies Sell Gap Insurance?
When you finance a car, your lender may require you to purchase gap insurance. If you lease one, the cost may be rolled into your monthly payment. Checking your coverage paperwork will tell you for sure.
Gap insurance can be purchased from dealerships, financial institutions like banks and credit unions, auto insurers, and other third parties. The length of time you have to purchase this coverage varies. For example, an auto insurer may require you to obtain gap insurance within 30 days of purchasing a new car, whereas some third parties allow you to purchase it at any time—as long as it is before a loss occurs. Your coverage may be in effect for the duration of your policy.
Companies that provide gap insurance include:
- AAA
- Allstate
- American Family Insurance
- Esurance
- Gap Direct
- Nationwide
- Credit Union PenFed
- Progressive
- State Farm (Payoff Protector included with State Farm Bank loans)
- The Hartford
How Much Does Gap Insurance Cost?
When purchased from an auto insurer, gap insurance typically costs 5% to 7% of your comprehensive and collision insurance premiums—about $5 per month on average. To determine your gap insurance premium, your insurer may consider your car's ACV as well as your age, state of residence, and previous car insurance claims.
Gap insurance is typically sold at car dealerships for $400 to $600 when financing, but it may be included in lease contracts. You can find out how much gap insurance costs from your car dealer. Gap insurance may be available for less than $200 at credit unions.
Insurance companies frequently require comprehensive or collision coverage before allowing you to add gap coverage. Other third-party sellers may be unconcerned. In any case, your lease agreement or lender will almost certainly require you to carry comprehensive and collision insurance.
How to File a Gap Claim
The process for filing a gap claim varies depending on the company and where you purchased the coverage. You would file a claim with car insurance companies just like you would with any other type of car incident. Typically, you can do so online, via the insurer's app, or by calling a representative.
If you have gap insurance from a third party, you will almost certainly have to go through their claims process after contacting your insurer. They may request that you contact them directly or the gap insurance company instead. You may also be required to complete and submit a form. A police report, as well as documents from your dealership, financing company, and insurance company, such as a copy of your settlement check, may be requested by companies.
Frequently Asked Questions
Is gap insurance worth it?
Gap insurance is most useful when there is a significant difference between your car's ACV and your loan balance. This could happen if your down payment is less than 20% or your financing term is longer than 60 months. It may not be necessary if you have paid off your car or purchased a used vehicle, if you have a short auto loan of less than 36 months, or if you have made a large down payment.
Do I have gap insurance now?
Check your auto insurance policy or financing documents, or call your agent or dealership to see if you already have gap insurance. Keep in mind that it may be automatically included on a leased vehicle through the dealership, leasing company, or car leasing insurance company.
Can I get a gap insurance refund?
For the unused portion of your gap insurance, you can usually get a prorated refund. If you purchased gap insurance as part of your loan, you may only have 30 days to cancel and receive a full refund. Following that, you will still receive a prorated refund, but it may be applied to your final payments. In that case, you wouldn't notice a difference in your monthly payments, but you'd pay off the loan faster.