What is Gap Insurance?
Is this optional auto insurance coverage worth the money? Let's define gap insurance and review some pros and cons.
How does gap insurance work?
Gap insurance covers the difference between what your car insurance pays if your vehicle is totaled and what you still owe on your loan or lease. Since insurers typically reimburse you based on the actual cash value (ACV)—not the original purchase price—you could end up "underwater," owing more than your car is worth.
For example, if you finance a $30,000 SUV, its value drops as soon as you drive it off the lot. If it’s totaled shortly after purchase, your insurer will only pay its current market value, which may be much less than your remaining loan balance. Gap insurance covers that shortfall, preventing you from making payments on a car you no longer have.
Note: Maintaining comprehensive and collision coverage is typically required to purchase gap insurance.
Do I need gap insurance?
Unlike state-mandated liability coverage, gap insurance isn’t required for everyone—but depending on how you purchased your vehicle, it could be a smart investment. Gap insurance helps cover the difference between what you owe on your car loan or lease and what your insurer would pay if your car is totaled or stolen.
More specifically, gap insurance is best for those who:Â
- Have a long loan term
- Made a small loan payment on your new car, like 20% or less
- Purchased a luxury car with a high depreciation value
- Drive their car more than the average driver (which means the car’s value will depreciate faster, potentially leaving you to pay more)
What is loan/lease payoff coverage?
Loan/lease coverage is another form of gap coverage. However, loan/lease payoff coverage differs in the amount that it pays. While gap insurance will often pay the full amount between what you owe and what your vehicle is worth, loan/lease coverage usually only pays up to 25% of your car's actual cash value. In many cases, this is enough to cover the gap you owe. However, if you have a higher-priced vehicle, it may not cover everything.Â
Some insurers also stipulate that gap coverage be purchased within 30 days of buying your vehicle. The time frame for buying loan/lease coverage is usually more lenient and can often be added on at any time.
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Is gap insurance required?
Unlike state-mandated liability coverage, not everyone is required to carry gap insurance. Still, depending on the nature of your car ownership, it could be a wise investment. Let’s break down some situations in which you should consider whether gap insurance is worth it.
Scenarios in which you should consider gap insurance:
A lower upfront payment (less than 20%) means you could owe more than your car is worth in the event of a total loss.
Longer loan terms (60 months or more) may result in your car depreciating faster than you can pay it off.
Many lease agreements require gap insurance to protect the leasing company’s investment.
Some vehicles lose value faster than others. In fact, a new car can depreciate by up to 30% in its first year.
If you carried debt from your old car loan into your new one, gap insurance can help prevent a financial shortfall if your vehicle is totaled.
Higher mileage accelerates depreciation, increasing the risk of owing more than your car is worth.
Where to get gap insurance
You can get gap insurance through your insurance company, the dealership, or your lender. There is a lot of information on which of these sources you should purchase gap coverage from. It’s hard to definitively say which one will be the cheapest or best option for you, so you’ll have to do some of the legwork yourself, comparing as many insurance providers as possible to get the best quotes and coverage options. Consider, however, the following advice:
- Is gap insurance automatically included in your lease agreement or does it require an additional purchase?
- If you fail to add comprehensive and collision coverage, your car insurance company — if you get the coverage through them — might not honor this coverage.
- The cost of a gap insurance policy will ultimately depend on where you get it and the make/model of your vehicle. Still, you should assess as many different avenues as possible to see which one is the cheapest.
Zebra Tip: Not everyone needs gap coverage
Gap insurance isn’t necessary for everyone. If you paid for your car in full or owe less than what your car is worth, you don’t need it. Additionally, once your loan balance drops below your car’s value, you can drop the coverage—it won’t provide additional benefits at that point.
How do I know if I have gap insurance?Â
Turns out you might already have gap insurance and not realize it! It’s particularly important to confirm whether or not you have gap coverage before shopping for a new auto policy, to save yourself both time and money.Â
How might you already have gap insurance? Well, it’s offered as optional coverage by many car insurance policy providers, and it can also be added on by car dealers.Â
So if you are unsure whether you already have gap insurance, you’ll want to read through your existing auto insurance policy and lease or loan. You can also contact your car insurance provider or the car dealership where you bought the car.
- Review your lease or loan paperwork – Some leases include gap insurance automatically, while others require an extra payment. Check your agreement for details.
- Confirm with your dealership – If it’s not in your paperwork, ask your dealership. They may offer gap insurance or confirm whether it was included in your purchase.
- Contact your insurance provider – Your current auto insurer may offer gap coverage, which could already be part of your policy. Reach out to your agent or check your policy details to confirm.
Cost considerations
Like any insurance policy, gap coverage adds an extra expense to your budget. While typically affordable, it’s important to weigh the cost against the potential financial risk of being left with a loan balance after a total loss.
If you’re unsure whether gap insurance is right for you, check your loan terms and consult your insurance provider for personalized advice.
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About The Zebra
The Zebra is not an insurance company. We publish data-backed, expert-reviewed resources to help consumers make more informed insurance decisions.
- The Zebra’s insurance content is written and reviewed for accuracy by licensed insurance agents.
- The Zebra’s insurance editorial content is not subject to review or alteration by insurance companies or partners.
- The Zebra’s editorial team operates independently of the company’s partnerships and commercialization interests, publishing unbiased information for consumer benefit.
- The auto insurance rates published on The Zebra’s pages are based on a comprehensive analysis of car insurance pricing data, evaluating more than 83 million insurance rates from across the United States.