Gap Insurance: How Does it Work and Do I Need it?

---

---

It's also known as guaranteed asset protection, and it's only applicable if you have a lease or loan on your vehicle. You only need to carry it until the amount you owe on your car is less than what it's worth — after that, you can cancel it.

Gap insurance generally costs between $50 and $250 per year to add to an insurance policy. What you'll pay depends on your insurer and how expensive your new car is. We always recommend that drivers compare quotes from multiple insurers to get the best rate.

What is gap insurance?

This situation is sometimes called being "upside down" or "underwater." Being upside down commonly happens if you finance a new vehicle. New cars may lose value faster than you pay off the loan.

You are especially likely to be upside down if you make a smaller down payment or opt for a long loan period, as that means your loan balance will decrease more slowly. Being upside down on your car loan isn't necessarily a bad thing, but it puts you in a position of extra financial risk.

If your new car is totaled or stolen, your comprehensive or collision coverages will cover up to the car's actual cash value. But you would still be responsible for the difference between how much you owe on the loan and the car's value. Gap insurance covers that difference.

Pros and cons of gap insurance

Gap insurance can offer a significant degree of protection in certain situations, but it is an extra cost to consider. If you are not required to purchase gap insurance but have the option, here are some elements to consider:

Pros

Cons

How much is gap insurance?

Compared to a typical car insurance bill overall, gap insurance is not expensive. The typical cost of gap coverage is $144 per year. However, there is a big difference in the cost of gap coverage across different insurers. Nationwide and Travelers had the best prices among the major insurers analyzed, with an average price of around $50 per year.

That's about 80% less than it costs at Farmers and Erie, the two most expensive insurers we looked at.

The cost of gap insurance also tended to correlate with each insurer's overall rates — in general, if an insurer has low prices for car insurance overall, its gap coverage prices tend to be on the affordable side, too.

---

All insurers take your car model into account when setting the price of gap insurance. In general, high-end vehicles like a Tesla or Mercedes cost more to buy coverage for than cheaper vehicles like a Honda Civic.

Where can you buy gap insurance?

There are three main ways to purchase gap coverage:

Of the three, buying gap coverage at the dealership is the most convenient, but it's also generally the most expensive.

Banks sometimes offer gap coverage as an add-on to your car loan. The price varies, but it's generally a one-time fee of around $300 — or you can roll it into your monthly car payment.

Car insurance companies usually provide gap insurance, too, and the cost is usually between $50 and $250 per year. Whether your insurer or your bank is a better choice for you will depend on your situation, including how big a down payment you've made and the length of your car loan. A longer loan period means you pay your car off more slowly, and your vehicle will be underwater for longer.

Car insurers that offer gap insurance

Most major car insurance companies offer gap insurance in some form, though many have limitations on which vehicles they will insure. Geico is the only major insurer that doesn't offer gap coverage at all.

If you are interested in purchasing only gap insurance, some car dealerships offer standalone gap insurance coverage. However, most of the time, insurers offer better rates for gap insurance compared to dealers. While car dealers might say you are required to have gap insurance or that you must buy it from them, it is up to you to decide if or where you buy it.

---

---

What is (and isn't) covered by gap insurance?

Gap insurance can be a beneficial part of your car insurance coverage, but it only protects you in certain situations. Here's when gap coverage will (and will not) protect you:

Who should get gap insurance?

Not every driver is eligible for gap insurance, and not every driver who is eligible should get it.

Even if you financed your car, you only need gap coverage if the amount you owe is more than the car's value. The best way to determine whether you need gap coverage is to find the cash value of your car and subtract it from how much you owe.

Calculating the gap between your car's value and what you owe is the best way to know if you need it. You may also be more likely to need gap coverage if any of the following situations apply to you:

You probably don't need to carry gap insurance forever. Once you pay down the loan to the point where it's worth more than you owe, you should remove gap coverage, as long as the terms of your lease allow it. In the event your car experiences a total loss, having gap insurance would not result in any extra payment.

Is gap insurance worth it?

Gap insurance is worth purchasing if the cost isn't significant and you could find yourself with a large bill to pay off a car you no longer have. It's important to do the math and determine how "upside down" you are on your current auto loan. If your loan payment is close to the actual cash value of your vehicle, you may see little to no payment in the event of an accident.

However, if your car is worth considerably less than the money still owed on it, gap insurance is well worth the usually low cost.

Many policyholders don't want to purchase additional coverage if it's not needed. Remember, your "gap" is shrinking as your car depreciates and you continue to make monthly loan payments.

How to tell if you have gap insurance

There are two places to check whether you already have gap insurance: your existing car insurance policy and the terms of your lease or loan. Gap coverage is sometimes sold as an add-on from the dealer when financing a car, so check to see if you're already paying for it before you add coverage.

Even if you have coverage, it's worth it to see if you can get cheaper gap insurance elsewhere, as car dealers often charge more for it.

How to calculate gap insurance

Calculating your gap insurance only requires taking the current value of your vehicle from the remaining balance of your loan. You should be able to consult your lender as to how much you still owe, and Kelley Blue Book is a good tool for finding your car's value.

In this example, you can see how gap insurance can potentially save you thousands of dollars if your car is totaled or stolen:

It's important to note the amount gap insurance covers goes down over time. At a certain point, it might be worth the risk to discontinue coverage, assuming your lender allows it.

Getting a refund for gap insurance

You don't need gap insurance once you're no longer upside down. After you have paid off enough of your vehicle's price that the amount you owe is less than the car's value, you can cancel gap coverage.

If you prepaid for coverage, then you'll be refunded any premium you haven't used. For example, if you have paid for six months of gap insurance but your car is paid off three months later, you'll be able to get a refund for the other three months.

How long does it take for gap insurance to pay?

The amount of time between an accident and gap insurance payout can in theory be as little as five days, depending on where you live, but it is far more likely to take at least several weeks and often more than a month. Different states have different laws, and the process has multiple elements.

Generally, an insurance company takes up to 30 days to declare a vehicle a total loss, although it can take longer. After it makes a determination, the insurer will begin to process the gap payment.

You should speak to both your insurer and lender or lessor through the process to get a sense of how long it might take. Crucially, you need to find out how the timing works between your next payment and when gap insurance payment starts covering the loss.

When does gap insurance not pay?

Gap insurance won't pay in a wide variety of situations, namely anything short of a total loss. If you are in an accident in which the car is repairable, gap insurance will not pay out. Some of the situations for which you will not get a gap insurance payout include:

Methodology

To illustrate the costs of gap insurance, we collected quotes for five new cars: a Honda Civic, a Ford F-150, a Hyundai Santa Fe, Mercedes GLC300 and a Tesla Model 3. We gathered rates from five top insurers that offer gap coverage: Erie, Farmers, Nationwide, Progressive and Travelers. All quotes are based on statewide averages in Illinois.

This analysis used insurance rate data from Quadrant Information Services. The quotes referenced were publicly sourced from insurer filings and should only be used for comparison purposes. Unless otherwise noted, quotes are for the base trim level. Actual rates for your model may differ.