What Does Gap Insurance Cover? A Complete Guide

Gap insurance is an optional add-on auto insurance policy that helps protect car owners against financial loss in the event their vehicle is totaled or stolen. It covers the "gap" between what your car insurance will pay out and what you still owe on your auto loan or lease.

But what exactly does gap insurance cover? When is it worth getting? This comprehensive guide will explain everything you need to know about gap insurance coverage.

What is Gap Insurance?

Gap insurance, also known as guaranteed asset protection insurance, is designed to pay the difference between:

• The actual cash value of your vehicle according to your car insurance company
• The remaining balance still owed on your auto loan or lease

For example, let's say you get into an accident and your vehicle is totaled. Your car insurance company determines your car was worth $15,000 at the time of the accident, but you still owed $18,000 on your auto loan.

Your regular car insurance would only pay out the actual cash value of $15,000. Without gap insurance, you'd be left owing $3,000 to your lender for a vehicle you no longer have.

Gap insurance is meant to cover this "gap" and pay the lender the remaining $3,000 so you don't end up making payments on a car that's been totaled.

Common Types of Gap Insurance

There are a few different types of gap insurance policies available:

• Vehicle replacement gap insurance - Covers the gap between the actual cash value and the full cost of replacing your vehicle with a new model.
• Loan/lease payoff gap insurance - Covers the gap between the cash value and remaining loan or lease balance. This is the most common type.
• Return to invoice gap insurance - Covers the gap between the cash value and the original purchase price of your vehicle.
• Wraparound gap insurance - Combines replacement and loan/lease gap insurance to provide maximum protection.

When Do You Need Gap Insurance?

Gap insurance can provide valuable financial protection, but it's not necessary for everyone. Here are some factors to consider:

• You purchased a new vehicle - New cars depreciate quickly. You could end up owing more than it's worth if it's totaled in the first few years.
• You have an auto loan - The more you finance, the greater the gap between the vehicle's value and your loan balance.
• You have bad credit - Getting approved for a loan likely meant accepting a higher interest rate, which increases the amount owed.
• You leased your vehicle - Leased vehicles depreciate quickly and have payoff amounts set in the contract.
• You have a long loan term (5-6 years) - Longer loans mean slower principal reduction, so the gap is wider.
• You made a low down payment - The more you finance, the more potential for a gap between the value and balance.
• You drive a luxury or specialty vehicle - These tend to depreciate faster than standard models.

Basically, if you owe more than the car is worth, gap insurance can be a smart financial buffer.

What Does Gap Insurance Cover?

Now that we've covered the basics, let's dive into the details of what gap insurance covers and the key areas of protection it provides:

Primary Coverage - The "Gap"

The primary benefit gap insurance delivers is covering the difference between:

• The actual cash value (ACV) of your totaled vehicle, as determined by your car insurance company. This is the amount your regular auto policy will pay out if your car is totaled.
• The remaining loan or lease payoff amount you owe to your lender or leasing company.

This is the "gap" that it is designed to fill. Gap insurance will pay the lender/lessor up to the amount you still owe, protecting you from having continuing loan payments on a totaled car.

For example:

• Your car's ACV is assessed at $12,000 by your insurance company
• You still owe $17,000 on your auto loan
• Gap insurance will cover the $5,000 difference

Other Possible Expenses

In addition to the primary gap coverage, gap insurance may also help reimburse you for other expenses, including:

• Deductible costs - For both your regular car insurance deductible and your gap insurance deductible.
• Sales tax - On the remaining value of your totaled vehicle or replacement vehicle.
• Registration fees & transfer fees - For getting a replacement vehicle registered and transferred to your name.
• Remaining lease payments - After a leased vehicle has been totaled.
• Disposition fees - Charged by the leasing company when turning in a totaled leased vehicle.
• Early termination fees - For ending your lease agreement early after a total loss.

However, keep in mind that policies and coverages can vary by insurer when it comes to these extra costs. Be sure to read the fine print and ask questions.

What is NOT Covered by Gap Insurance?

While gap insurance provides valuable financial protection, there are some limitations to coverage that you need to be aware of:

• Optional equipment & custom upgrades - Things like premium wheels, sound systems, lift kits, etc. usually aren't covered. Only the base model vehicle is covered.
• Wear & tear - You won't be reimbursed for the vehicle's depreciation due to normal aging and use over time. Only sudden total losses are covered.
• Unpaid finance charges or interest - Any interest or fees still owed on your loan won't be covered, only the remaining principal balance.
• Missed loan payments - If you were behind on payments when the vehicle was totaled, past due amounts will not be paid.
• Insurance deductibles - Your regular car insurance deductible still applies and is not covered. Some gap policies may cover your gap deductible.
• Salvage value - If you retain ownership of the totaled vehicle to sell for parts, the salvage value will be deducted from the payout.

In summary, gap insurance only covers the sudden loss of the vehicle itself. Any extra costs or fees you owe will not be included in the payout.

When Can You Use Gap Insurance?

Gap insurance comes into play when your vehicle is declared a total loss by your car insurance provider. A total loss means the vehicle is stolen or damaged beyond reasonable repair.

Here are the common situations when you can file a gap insurance claim:

Car is Totaled in an Accident

If your vehicle is totaled in a crash and your insurance company declares it a total loss, gap insurance will kick in to cover the difference between the cash value and the remaining loan balance.

Even if the accident wasn't your fault, you can still file a gap insurance claim to avoid paying for a car you can no longer drive.

Car is Stolen & Not Recovered

If your vehicle is stolen and not recovered, your car insurance company will declare it a total loss after a certain period of time has passed (usually 30 days).

At that point, gap insurance will pay off the remainder of your loan balance, less any possible deductible.

Vehicle is Deemed a Total Loss Due to Weather

In the event your vehicle is damaged by flooding, hail, fallen trees or other weather events, and your regular insurance declares it a total loss, gap insurance will cover the gap between the ACV payout and what you owed.

Car is Deemed a Total Loss Due to Fire

Fires, whether accidental, due to mechanical failure, or caused by arson, can completely destroy cars. If your car burns beyond reasonable repair, gap insurance can help reimburse you for the unpaid loan balance after your insurer's fire payout.

Use Caution With Voluntary Repossession

Voluntarily surrendering your vehicle to your lender generally isn't covered, unless the car was declared a total loss before you surrendered it. Even then, coverage may still be denied. Check your individual policy.

In order for gap insurance to apply, the vehicle itself needs to be destroyed or stolen. Situations like bankruptcy or inability to make payments do not qualify you to file a gap insurance claim.

How Much Does Gap Insurance Cost?

Gap insurance premiums will vary quite a bit based on your location, vehicle, driving history, and insurer. However, here are some ballpark figures on what to expect:

• Cost per year: $200 to $400
• Monthly cost: $15 to $35
• One-time lump sum payment: $400 to $700

Typically, you'll pay more for gap insurance if you lease a vehicle versus financing one. High-end luxury and sports cars also tend to have higher gap insurance rates.

Some key factors that affect your rate include:

• Vehicle type, age, and value
• Amount financed/owed
• Loan/lease term length
• Your credit score
• Where you live
• Driving history

The most affordable way to get gap insurance is often as an add-on through your regular auto insurance company. Purchasing through your auto dealer is also common. Standalone policies from specialty insurers tend to be the most expensive route.

How Does Gap Insurance Work When You Have a Claim?

Understanding how gap insurance claims work is important, so here is a step-by-step overview of the process:

1. Your vehicle suffers a total loss - This could be from an accident, weather event, theft, fire, or other cause as discussed earlier.
2. You report the total loss to your car insurance company - They will investigate, confirm it's a total loss, and determine the actual cash value payout you'll receive.
3. Your car insurer pays the ACV - This is paid to you (or your lender if you have a lienholder on your policy). It's usually less than what you still owe.
4. You pay your regular deductible - Your normal car insurance deductible, often $500-$1000, comes out of the settlement.
5. You submit claim documents to your gap insurer - This includes proof of total loss, the settlement amount, and your remaining loan balance.
6. Gap insurance covers the "gap" - They will pay the difference between the ACV and remaining loan balance, up to your coverage limits.
7. You pay the gap deductible (if applicable) - Some gap policies have a separate deductible ranging from $50 to $500 that applies.
8. The lender/lessor is paid - Your loan or lease is settled and you are released from any further obligation. Hurray!

Gap insurance helps simplify and streamline the claims process so you can focus on finding a replacement vehicle rather than figuring out how to pay for your old one.

Where to Get Gap Insurance

If you've determined gap coverage is right for your situation, here are some of the main options for where to get a policy:

Your Auto Insurance Company

The most popular and affordable way to get gap insurance is to add it to your existing auto insurance policy. This provides the convenience of a single point of contact, and packages often give multi-policy discounts. Almost all major insurers like State Farm, Geico, and Allstate offer gap coverage.

Your Auto Dealership

Getting gap insurance through the dealer that sold you the car is very common. This allows you to roll the policy cost into your financing. Dealer pricing can sometimes be higher, but may come with perks like free re-enrollment when you lease or buy another car from them.

Leasing Company

If you lease a vehicle, the leasing company will often provide gap coverage options because of their financial risk on the asset. Getting your gap insurance through the lessor simplifies things, but still compare pricing.

Specialty Gap Insurers

There are providers that specialize specifically in gap insurance, like Wilko, AGWS, and AAA. They may offer more specialized packages. However, specialty companies tend to be pricier than auto insurers.

Credit Card Benefits

Some credit card companies provide basic gap insurance as an extra benefit if you put your entire auto loan on their card. This perk may have limits, but can essentially give you free supplemental protection.

Factors That Impact Gap Insurance Payouts

If you do end up needing to use your gap insurance, there are some important factors that can impact the size of your payout:

• Total loss settlement from regular auto insurer - This is the basis the gap payment will be calculated on. The higher the settlement, the less gap has to cover.
• Remaining principal loan/lease balance - Gap will only pay what you still actually owe at the time, not necessarily the original amount financed.
• Type of gap coverage you purchased - A basic loan/lease gap plan will pay less than an enhanced new car replacement policy.
• Time between purchase and total loss - The longer you've paid down the loan, the smaller the remaining gap will be.
• Add-ons not included in value assessment - Things like lift kits, premium wheels, and extended warranties don't add to your vehicle's assessed value, so gap has to cover more.
• High deductibles - Both your regular and gap insurance deductibles come out of pocket before gap coverage applies.

Understanding these factors can help you pick the right gap insurance limits when purchasing a policy. Also be sure to read the fine print!

Do You Need Gap Insurance on a Used Car?

Gap insurance can still provide protection when purchasing a used vehicle, but the benefits decline for older model years.

Here are some considerations regarding gap coverage for used cars:

• The older the car, the smaller the gap - Used cars have already undergone initial rapid depreciation, so the difference between value and loan balance shrinks.
• Shorter loan terms - Used car loans typically have shorter repayment periods (3 years or less), giving less time for a gap to develop.
• Higher down payments - Larger down payments further reduce the amount financed, decreasing gap risk.
• Lower loan amounts - Even financed amounts under $15,000 have limited gap exposure, reducing the need for coverage.
• Consider your car's value and loan amount - A lightly used 2-year old car with 80% financing could still warrant gap insurance. A 15-year old clunker with 50% down probably doesn't.

If buying a used vehicle, look at the factors above to determine if gap insurance makes financial sense for your situation. The older the car and smaller the loan, the less gap risk exists.

Do I Need Gap If I Paid Cash for My Car?

If you paid the full cash price for your vehicle upfront and have no auto loan, then gap insurance would not provide any benefit for you.

Since you don't owe anything to a lender, there is no "gap" for insurance to cover. The only financial loss in case of a totaled vehicle would be the car itself, which regular insurance will reimburse you for (minus the deductible).

The key thing gap protects against is having to continuing making loan payments after no longer having the vehicle. Without a lender, your losses end with the actual cash value payment from traditional auto coverage.

So in summary - no need to get gap insurance if you don't have an outstanding auto loan or lease! It will just be an unnecessary added cost. Make sure you don't let an overly pushy car dealer upsell you on gap if paying with cash.

Is Gap Insurance Worth It?

Whether gap insurance is "worth it" really depends on your personal situation and attitude towards risk. Here are some things to think about:

• Consider your peace of mind - Gap coverage provides valuable financial peace of mind if your brand new car gets totaled shortly after purchase. For some people, this alone makes gap insurance worth it for the added security.
• Weigh the loan payoff amount - The more you owe relative to the car's cash value, the greater the risk gap insurance protects against. High loan-to-value situations warrant gap strongly.
• Think about your financial situation - If you couldn't afford thousands in uncovered loan payments if your vehicle got totaled, gap is likely worth securing. On the other hand, if you have the savings to handle it, the protection matters less.
• Compare the cost - Gap insurance only costs $200-$400 per year. That's a small fraction of loan balances. For most people, it's worth the minimal investment, but weigh the expense against your personal risk tolerance.
• Read your regular auto policy - Many standard insurers already include some secondary gap provisions. See what coverage you already have before purchasing additional gap.

At the end of the day, optional insurance comes down to your personal comfort level with risk and ability to shoulder financial surprises. For a few hundred dollars a year, gap insurance can provide true peace of mind.

FAQs

Do I have to get gap insurance from the dealer?

No, you can shop around and buy a gap policy from your auto insurance company, a specialty provider, or even get basic protection through some credit cards. Dealer-offered plans can be convenient but are often the most expensive option.

Can I cancel gap insurance and get a refund?

You typically can cancel a gap policy anytime and get a pro-rated refund for the unused portion you already paid for. Just be aware there is usually a small cancellation fee. Refunds are only provided during the initial policy term.

Does gap insurance cover stolen cars?

Yes, standard gap insurance will pay out on stolen vehicles once they are declared a total loss if not recovered after a certain time period, usually 30 days. It's treated the same as any other total loss. You'll need to file a police report to complete the claims process.

Can you purchase gap months after buying your vehicle?

It depends on the insurer, but most allow you to enroll in gap insurance anytime during the first 1-3 years after initially purchasing the vehicle. There are generally no medical or driving history checks. But expect to pay a higher rate than if you had gotten it initially. After several years, most companies will no longer issue a new gap policy.

Does gap insurance cover your deductible?

Unfortunately gap insurance does not reimburse your standard auto insurance deductible that you pay on your primary claim. However, most gap insurers waive the separate gap deductible or set it at just $50-$100. So your total out-of-pocket cost is usually minimal.

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