What Is Gap Insurance, And Is It Worth It?

Imagine your car is totaled a year after you buy it. You expect the insurance money to clear your loan. Then you find out that the payout is lower than what you still owe. That difference is the gap, and gap insurance is designed to cover it.

It is optional coverage, and it is not right for everyone. This guide explains how it works so you can decide for yourself.

How Does Gap Insurance Work?

A standard car insurance policy pays what your car is worth at the time of the loss, not what you originally paid or what you owe. If your car is stolen or totaled and you owe more than its value, you still owe the lender the difference.

Gap insurance pays that difference. Here is a made-up example: you owe $25,000, and the car is worth $20,000 when it is totaled. Your regular policy pays the $20,000 and gap insurance helps with the remaining $5,000. Real policies have terms and limits, so read yours carefully.

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When Gap Insurance Can Make Sense

Small down payment
If you put down less than about 20 percent, you are more likely to owe more than the car is worth.
Long loan
Loans of five years or more build equity slowly.
Leased cars
Many leases require gap coverage, so check your agreement.
Fast depreciation
Some models lose value faster than others.

How Quickly Does A Car Lose Value?

According to the Insurance Information Institute, as quoted by Bankrate, most cars lose roughly 20 percent of their value within a year. That is why the early years of a loan are when the gap is usually largest.

How Much Does It Cost?

Estimates vary. Sources citing the Insurance Information Institute mention figures from about $20 a year when gap coverage is added to your own policy, up to $50 to $150 a year in other estimates. Buying it from a dealership or lender often costs more, and if it is rolled into your loan you may pay interest on it. It is usually worth asking your own insurer first.

What It Does Not Cover

Missed loan payments. It is not payment protection.
Repairs when the car is not a total loss.
Anything your regular policy does not cover. Gap only works alongside collision and comprehensive.

When Can You Drop It?

Once you owe less than the car is worth, there is no gap to cover. At that point you can usually cancel. Check your loan balance against the car’s value every so often, and ask your insurer or lender about any refund of unused coverage.

Frequently Asked Questions

Is gap insurance required?

Not by law, but a lender or lease agreement may require it.

Is new-car replacement the same thing?

No. New-car replacement coverage can pay for a new car of the same make and model, which is a different benefit and usually costs more.