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What is GAP Insurance and How Does it Work?

GAP Insurance

Gap insurance is another optional coverage you can purchase to get more protection from your auto insurance policy. It’s also commonly referred to as loan/lease payoff coverage. This coverage applies if your car is stolen or deemed a total loss and your loan amount is more than your vehicle’s worth – also known as the gap. Gap coverage pays this difference. For example, if your loan balance is $25,000 and your car’s worth at the time of a loss is only $20,000, your auto policy’s loan/lease payoff coverage would cover the $5,000 gap, less your deductible.

How does gap insurance work?

What gap coverage really does is protect you from depreciation. After you purchase your car, it will begin to depreciate rather quickly. In some instances and for certain makes, the depreciation can be fairly significant.

When you finance your vehicle, and especially if it’s leased, this depreciation creates a gap between value and outstanding balance. Let’s look at an example with gap protection and without:

gap insurance example

Amount you get without gap insurance


Amount you get with gap insurance


Gap Coverage Example:

You buy a new car and finance $30,000 to help pay for the vehicle. After owning the car for a few years, you have reduced the loan balance to $25,000. However, the car is now only valued at $20,000. There is a $5,000 gap between value and loan balance. You have an accident that totals the car. Your insurance company pays out $20,000 as the amount to replace your car less your deductible and gap coverage would pay the $5,000 to cover the loan balance. Without loan/lease payoff protection, you’d only receive $20,000 (minus your deductible).

With most insurance companies, in order to qualify for gap coverage, you have comprehensive and collision coverage too.

What does gap insurance cover?

Generally, gap coverage applies any time your insured vehicle is totaled in an accident. For some insurance companies, if your car is lost in a theft, gap will pay the actual cash value (ACV) of the vehicle minus your deductible.

Keep in mind, that gap protection doesn’t cover engine failure or other mechanical repairs.

Do I need to buy gap coverage?

There is no regulation requiring gap coverage in any state. However, some leasing companies may require you to purchase it. When you lease a vehicle, the finance agreement may automatically place gap insurance on your loan. You are not compelled to take this insurance and can decline the coverage.

Is loan/lease payoff coverage worth it?

Gap coverage is not very expensive, so when you notice a difference between your car’s value and your outstanding loan balance, loan/lease payoff coverage is well worth the money. Here are a few instances where you should consider buying gap protection:

  • You’re leasing your car
  • You made a lower down payment on a new car. Anything below 20% should be considered.
  • You elected to take a long finance term. The longer-term creates more opportunities to create a gap.
  • You purchased a vehicle with a known rapid depreciation.
  • You roll over a loan balance or fees from your trade-in. This means you may have started your loan with a gap.

How much is gap insurance?

The cost for gap coverage varies by insurance company. You can buy gap protection for as low as $5.00 per month, however.

If you want an exact price for your loan/lease payoff insurance, get a car insurance quote online and we’ll give you an answer in minutes.

How long does gap coverage last?

Once you add gap insurance, it applies for the duration of your policy. However, you won’t need gap coverage for the entire length of the loan. Once you owe less than what the car is worth, you can drop the insurance.

How to purchase gap coverage

While some dealers offer gap insurance for both leased and financed cars, you may end up paying interest on your gap coverage due to the bundled lease/loan payment. Buying gap insurance through your auto insurer can be a smarter option.

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