Gap insurance (also known as loan/lease payoff) is an optional auto insurance coverage that applies if your car is stolen or deemed a total loss. When your loan amount is more than your vehicle is worth, gap insurance coverage pays the difference. For example, if you owe $25,000 on your loan and your car is only worth $20,000, your policy's loan/lease payoff coverage covers the $5,000 gap, minus your deductible.
How gap insurance works?
When you buy or lease a new car, the vehicle starts to depreciate in value the moment it leaves the car lot. In fact, most cars lose 20 percent of their value within a year.
If, when you finance the purchase of a new car and put down only a small deposit, in the early years of the vehicle's ownership the amount of the loan may exceed the market value of the vehicle itself.
In the event of an accident in which you've badly damaged or totaled your car, gap insurance covers the difference between what a vehicle is currently worth (which your standard insurance will pay) and the amount you actually owe on it.
Do I need GAP insurance?
If you’re in one of the following situations, you might want to consider GAP insurance:
Keep in mind that if you buy a GAP insurance policy, you don’t need to keep it forever. If it’s optional, you should be able to cancel your GAP insurance policy.
How do I get GAP insurance?
GAP insurance is typically purchased at the time you buy comprehensive and collision coverage, though you might be able to get coverage after you buy a vehicle. But some insurers have requirements to purchase GAP insurance, like the car needing to be no more than two or three model years old.
Most auto insurance companies sell GAP insurance, and there’s a good chance that your car dealership does, too. But GAP insurance through a dealer is typically more expensive.
How does gap insurance work if your car is totaled?
Gap insurance only fills the gap between the actual cash value of a car at the time of a claim and the current amount still owed on a car loan. The specific gap policy covers, for instance, $4,000 on a vehicle assessed at $16,000, but with $20,000 still to be paid on the loan. Total loss can vary by state law and/or by the insurance provider.
How long does gap insurance last?
Once you add gap insurance, it applies for the duration of your policy. However, you won't need gap coverage for the entire length of the loan. Once you owe less than what the car is worth, you can drop the insurance.
Do I need gap insurance if I have full coverage?
While you might feel like your auto insurance coverage is robust, auto insurers don’t offer any one policy called “full coverage” that’s designed to protect you against every possibility. Instead, you get more protection by layering different types of coverage (e.g., liability, collision, comprehensive) together. Adding gap insurance to your existing coverages can be an excellent way to fill out your protection on and off the road, getting you closer to the ideal of full coverage.