Gap Insurance

What is gap insurance?

Gap (guaranteed asset protection) insurance covers the difference between a vehicle’s actual cash value (what your primary auto insurer will pay after depreciation) and the remaining balance on your auto loan or lease when the car is totaled or stolen. It protects you from owing money on a vehicle you no longer have.

How it works

• Standard collision/comprehensive insurance pays the car’s current market value, not the original purchase price or the outstanding loan.
• If your loan balance exceeds that market value, gap insurance pays the shortfall.

Example:
– Loan balance: $20,000
– Insurer’s payout (actual cash value): $15,000
– Gap insurance covers: $5,000

Cars typically depreciate quickly (often a large percentage in the first months and years), which is why the loan can outpace value early in the financing term.

Who should consider gap insurance

Consider gap coverage if any of the following apply:
– You made little or no down payment.
– You financed with a long-term loan (more than 60 months).
– You rolled negative equity from a previous, upside-down loan into the new loan.
– You plan to put high mileage on the car or drive in ways that accelerate depreciation.
– You are leasing a vehicle (many lease agreements require gap coverage).

Is gap insurance mandatory?

• Not legally required in most places.
• It may be required by your lender or lease contract—always review the loan or lease terms.

Cost and where to buy

• Cost varies by state, vehicle, driver profile and insurer.
• Typical purchase options:
• As an endorsement (add-on) to your auto insurance policy — often affordable and convenient.
• From the dealer at time of purchase — usually more expensive; offers sometimes bundled into vehicle financing.
• Through separate insurers that specialize in gap products.
• Compare total cost (upfront price vs. monthly premiums, and whether the dealer’s offer is financed into your loan) before buying.

Questions to ask before buying

• Does my lender or lease require gap insurance?
• Can my current insurer add gap coverage, and at what cost?
• If offered by the dealer, is that fee financed into the loan? (Financing it increases the loan balance and could recreate the problem.)
• How long will coverage last, and are there exclusions or limits?

Quick checklist

• If you owe more than the car is worth, get gap insurance.
• If you put a substantial down payment and have a short loan term, gap coverage may be unnecessary.
• Always compare dealer offers with quotes from your auto insurer.

Bottom line

Gap insurance is a useful, relatively inexpensive protection for people who are likely to be “upside down” on a loan or who lease a vehicle. It prevents a totaled or stolen car from leaving you responsible for a remaining loan balance on a vehicle you no longer possess.