Is Gap Insurance Worth It?

It's not required, but it could be worth the money: let's learn more about gap insurance.

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Is gap insurance worth the money?

Gap insurance, while not legally required, can be a smart option for most drivers. In addition to your regular auto insurance policy, it's wise to carry gap insurance coverage, especially if you have a valuable new vehicle that is either financed or leased. Let’s explore the ins and outs of gap insurance and how it can be a great add-on to your auto coverage.

Is gap insurance worth it?
  1. How does gap insurance work and what does it cover?
  2. Is gap insurance required?
  3. Where can you buy gap insurance for your car?
  4. Gap insurance considerations
  5. Additional resources

How does gap insurance work and what does it cover?

As its name implies, gap insurance covers the financial “gap” between what an insurance company will pay you for your car if it’s totaled and what you might owe to a lender or dealership. Because most car insurance policies reimburse you based on an actual cash value (ACV) and not replacement cost value (RCV), it's possible to be left in a situation where you are underwater — or upside down — on a car loan, meaning you owe more on your auto loan than the vehicle is worth.

Let’s say you bought a 2018 SUV worth $30,000 and took out a loan to pay for it. Because of the rate at which vehicle values depreciate, your SUV will be worth significantly less than the $30K you paid for it as soon as you drive it off the lot. If you were to total your car soon after purchase, your car insurance company will only pay what that vehicle would be worth now — usually much less than the value of your loan. So, you would still have to make car payments on a vehicle that was deemed a total loss. Gap insurance would cover the difference between the value of your auto loan and the value of your car.

*Bear in mind, maintaining comprehensive and collision coverages is usually required to carry gap insurance coverage.

Do you need gap insurance?

Unlike your state-required 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.

  • You have a financed car:
  • As we’ve demonstrated in the example above, if you have a loan on your vehicle, gap insurance might be something you should consider.

  • You have a leased vehicle:
  • If you have a leased vehicle, you might be required to carry gap insurance. While it may vary based on your agreement, most will require you carry this coverage. This is because leased vehicles tend to be brand new vehicles which depreciate rapidly, and lenders do not want to be left uncompensated if the leased vehicle is damaged.

  • You make a small down payment:
  • If you make a smaller down payment — say less than 20% — the remaining balance can hurt you in the event your car is totaled.

  • You're financing your vehicle long-term:
  • If you’re financing over a longer term — more than two years — consider gap insurance. With longer-term financing, your vehicle will depreciate faster than you can actually pay off the loan balance. This could leave you in a tricky situation.

  • You’ve bought a vehicle that doesn’t have great resale value or depreciates quickly:
  • Look at the cost of ownership on Edmunds or Kelley Blue Book. If your vehicle depreciates quickly but you still have a loan on the vehicle, chances are the value you will receive from your insurance company won’t cover the loan.

Where can you buy 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 rates and coverage options. Consider, however, the following advice:

  • Is gap insurance automatically included in your lease agreement or 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 cheapest.

Gap insurance considerations

Whether you are purchasing a used or new car, buying gap insurance can be a great move. Adding gap coverage to your car insurance policy provides an extra bit of protection at an affordable price. According to the Insurance Information Institute, gap insurance costs only about $20 a year with most auto insurance policies. The cost can, of course, vary from one car insurance company to another, but it is a relatively small price to pay for the peace of mind that such a policy brings.

Additional resources

Looking for more information? See our additional articles below.