If your car is totaled or stolen, gap insurance coverage will pay the difference between the actual cash value (ACV) of the vehicle and the current outstanding balance on your loan or lease. Sometimes it will also pay your regular insurance deductible.Skip to article
Written by: Mark Vallet Contributing ResearcherMark is a freelance journalist and analyst with over 15 years of experience covering the insurance industry. He has extensive experience creating and editing content on a variety of subjects with deep expertise in insurance and automotive writing. He has written for autos.com, carsdirect.com, DARCARS and Madtown Designs to name just a few. He is also a professional blogger and a skilled web content creator who consistently turns out engaging, error-free writing while juggling multiple projects.
Reviewed by: Laura Longero Executive EditorLaura is an award-winning editor with experience in content and communications covering auto insurance and personal finance. She has written for several media outlets, including the USA Today Network. She most recently worked in the public sector for the Nevada Department of Transportation.
Gap insurance is a type of auto insurance coverage that covers the difference between what you owe on your car and its actual cash value if it is damaged or totaled.
It is optional coverage, and you should consider buying it if you have leased or financed your vehicle.
Key HighlightsMark is a freelance journalist and analyst with over 15 years of experience covering the insurance industry. He has extensive experience creating and editing content on a variety of subjects with deep expertise in insurance and automotive writing. He has written for autos.com, carsdirect.com, DARCARS and Madtown Designs to name just a few. He is also a professional blogger and a skilled web content creator who consistently turns out engaging, error-free writing while juggling multiple projects.
Reviewed by: Laura Longero Executive EditorLaura is an award-winning editor with experience in content and communications covering auto insurance and personal finance. She has written for several media outlets, including the USA Today Network. She most recently worked in the public sector for the Nevada Department of Transportation.
Table of Contents Table of ContentsGap insurance is designed to cover the gap between your vehicle’s actual cash value (ACV) and the amount you still owe on your lease or loan when your vehicle was totaled or stolen.
“In many circumstances, the consumer owes more money on the vehicle than it is worth,” says Nick Schrader with Texas General Insurance in Houston. “Gap coverage will pay the difference between the loan amount and the actual cash value. If the car is totaled in a catastrophic loss, the gap coverage will pay off the loan amount, even if the vehicle is depreciated to a lower amount.”
Suppose your insurer totals your vehicle due to damage by a covered peril. In that case, the insurer will pay you the actual cash value of your car, assuming you are carrying comprehensive and collision coverage. ACV is the actual value of the vehicle when it was destroyed. Your insurance company doesn’t consider how much you owe on the vehicle; the max they will pay out is the actual value of the car.
New cars tend to lose value once driven off the lot. While there isn’t an exact pre-determined rate at which vehicles depreciate, generally expect a new car to lose 20% of its value in the first year and roughly 15% per year until it’s about four years old.
Because newer vehicles depreciate so quickly, you may owe more on your car loan than the vehicle is worth if you total it in the first three years or so of ownership. This is where gap insurance steps up; it covers the difference between the ACV your insurer pays out and how much you owe on the vehicle loan.
If you are not carrying gap insurance, you will need to pay off the balance of your car loan out of pocket. Gap insurance typically must be purchased within 30 days of a new car purchase.
If your car is stolen or totaled, gap insurance will pay the difference between the vehicle’s ACV and the current balance on your loan or lease. In some cases, it will also cover your insurance deductible.
Policyholders often assume that if their car is stolen or totaled, their insurer will pay out the amount they paid for the vehicle or at least the amount they owe on their loan or lease.
Unfortunately, this is not the case. Your insurer will only pay out the ACV when it was stolen or totaled, leaving you to cover the loan balance. This is why most car insurance companies offer gap insurance as optional coverage.
You must also have comprehensive insurance and collision coverage to buy gap coverage, but your lender typically requires those if you lease or finance your car.
Gap insurance will pay off your loan or lease amount after your insurer pays out the actual cash value of your stolen or totaled vehicle. However, gap insurance doesn’t cover several things, including overdue payments, security deposits and add-on equipment.
Here are some reasons gap insurance won’t pay due to some of the most common policy exclusions. Please note this list is not exhaustive; always read your policy fully to ensure you know all exclusions.
In most cases, gap insurance won’t pay for the following:
Yes, gap insurance covers your car if it’s stolen and not recovered. It works with your comprehensive coverage for incidences of theft. Comprehensive will pay out up to the actual cash value of your car, minus your deductible if your car is stolen. Gap insurance would then pay the difference between the actual cash value payout and what you owe on your loan or lease.
Let’s look at an example of how gap coverage helps cover the gap between what you owe on your car loan or lease and the ACV insurance payout if your vehicle is stolen or totaled.
You buy a car that costs $25,000 and drive it off the lot. After paying the down payment, you owe $24,000 in car payments over five years (0% interest loan = $400 car payments). You purchase comprehensive and collision coverage with $500 deductibles.
You have an accident in the first year of ownership and your vehicle is totaled. The insurance company determines that the car’s actual cash value is only $22,000, but at the time of the loss, you still owe $23,500.
Gap insurance should pay the difference plus your deductible, totaling $2,000. It should be noted that not all gap policies pay the deductible.
Here is a quick breakdown:
While the terms gap insurance and loan/lease coverage are often used interchangeably, they aren’t quite the same. Gap insurance will pay the difference between the amount you still owe on a vehicle and the actual cash value (ACV) paid out by your car insurance company, regardless of how much it is.
Lease/loan coverage, on the other hand, typically has limitations on how much it will pay out. In most cases, it limits coverage to 25% of the ACV of your vehicle. In most cases, lease or loan coverage doesn’t cover your deductible.
If you owed $25,000 on your car loan and the actual cash value of your vehicle was $20,000, then 25% of its value would be $5,000, which is the same as the gap of $25,000 due – $20,000 paid by the insurer. In this case, lease or loan insurance would have covered the whole amount, but that is not always true.
Many car owners don’t understand how quickly a new car depreciates. While it varies by vehicle, in many cases, a new car can be worth 10% less than you paid as soon as you drive it off the lot.
Depreciation continues over the life of your car, especially in the first five years you own it. According to Carfax, the value of a new vehicle can drop by more than 20% after the first 12 months of ownership. Then, for the next four years, you can expect your car to lose roughly 10% of its value annually.
This means a new car can be worth as little as 40% of its original purchase price after five years, so an actual cash value insurance payout for your vehicle will likely be much less than what you owe for at least the first several years.
If you have a lease on a vehicle, your leasing company will typically require gap insurance; sometimes, it is part of the lease payment.
If you have purchased a new vehicle, gap insurance often makes sense, particularly if you struggle to cover the gap if your car was stolen or totaled. Here are a few situations where gap coverage makes sense:
There’s no reason to buy this coverage if you purchased the vehicle with cash or own it outright. Gap insurance only steps up when you owe more than the value of your vehicle. If you own the car outright, there would be no payout from gap coverage, so there is no need to carry this coverage.
Gap car insurance is only needed if you have negative equity in your car, meaning you owe more than the vehicle’s value. If you have paid a large down payment, 20% or more, gap insurance may not be necessary.
Depending on the vehicle and your loan amount, it can vary. In general, if you have made a down payment of at least 20%, you probably don’t need to carry gap coverage.
While you need gap insurance if you owe more on a vehicle than its value, gap coverage isn’t required by any state as part of your car insurance policy.
Gap insurance is optional; however, it’s not uncommon for lease contracts to include gap insurance. Sometimes, it’s called auto loan/lease coverage or loan/lease payoff coverage.
If your lessor requires gap insurance, they should include it within the lease’s cost. This means that the monthly price quoted by the dealer should consist of gap coverage if they require it.
While gap coverage is not legally required in any state, some financial institutions may want you to carry it as part of their loan requirements.
The answer to this question will usually depend on your situation. Gap insurance is often worth the cost of coverage in certain situations, while in others, you may be able to skip this coverage.
Gap insurance is usually very affordable. The average cost of gap insurance in the U.S. is $89 per year, which is about $7 per month. However, gap insurance premiums can vary depending on your age, insurance company and state.
Here are a few situations where gap coverage is probably a good idea:
If you have paid a 20% or higher down payment, have only financed the vehicle for a couple of years, don’t drive much or could easily cover the gap out of pocket, you may not need to carry gap insurance.
Gap insurance only pays out if your vehicle is stolen or totaled, and you owe more on your car loan than the actual cash value payout from your collision or comprehensive.
If your collision or comprehensive claim is denied, your gap coverage will not pay out. There are also issues that could reduce your gap insurance payment. For instance, if you are late on a car payment before the claim, that amount will be deducted from your gap insurance payout.
When does gap insurance not pay? There are numerous circumstances when gap coverage won’t pay out. If your collision or comprehensive claim is denied, gap coverage will not pay out. The same is true if you didn’t pay your premium and your coverage lapsed.
Here are a few other situations where gap insurance will not offer coverage:
If you are wondering if gap insurance covers your deductible, the answer will vary depending on the specifics of your policy. Some policies pay the deductible, while others do not.
When it does pay the primary insurance deductible amount, the deductible amount isn’t reimbursed. Instead, the primary insurance deductible is taken from the payout of your totaled vehicle and covered as part of your unpaid loan balance, which gap insurance pays.
Gap insurance is a coverage that needs to be purchased shortly after buying or leasing a new car. You can usually purchase gap coverage from the following:
No, you cannot purchase gap insurance unless you are carrying collision and comprehensive coverage. You will also need to be carrying the required minimum liability coverage mandated by your state.
Yes, it is often possible to purchase a gap policy on a used vehicle, but insurance companies’ guidelines vary. Many insurance companies will only write a gap policy on used vehicles that are less than three years old, some insurers lower that threshold to one year.
Once a car hits four or five years old, the benefits of a gap policy fade quickly, so it only makes sense to buy gap coverage for a used car that is 1 to 3 years old.
No, a gap insurance policy cannot be used as proof of insurance. A police officer, the Department of Motor Vehicles (DMV) or a loan officer will not accept a gap policy as proof of insurance. Gap insurance is not the right type of insurance needed to show financial responsibility for vehicle registration.
A police officer will want to see proof that you are carrying the state-required liability coverage, which would be in your primary car insurance policy. Your car insurance company will send an insurance card that you should keep in your vehicle as proof of insurance. It is usually possible to store an electronic version of your proof of insurance on your phone.
No, you cannot get gap coverage for other loans. It doesn’t work with mortgage loans, credit lines, balloon payments or other types of non-vehicle-specific loans.
No, insurers won’t offer coverage if your loan is through a private individual. When dealing with a bank or finance company, the insurer is aware of the terms, has access to the paperwork and works with a national company.
A private party loan makes it hard for the insurance company to be assured that the loan is only for the vehicle, payments are being made and the loan won’t be called in if you and the private party disagree.
No, in most cases, gap insurance must be purchased within a short timeframe. While insurance companies’ terms will vary, gap insurance is generally available on new, used and refinanced vehicles that are less than a year old.
Some insurance companies will write gap coverage on vehicles up to 3 years old, but terms and guidelines vary so check with your insurer or agent regarding the availability of gap coverage.
No. You cannot get gap insurance after an accident that results in your vehicle being totaled. If you are not carrying gap coverage, you will have to you will have to pay off your car loan out of pocket.