Buying GAP Insurance Coverage: What You Need To Know in 2023

If you purchased a new car and took out a loan, you may have considered getting GAP insurance as a part of your car insurance policy. GAP insurance reimburses drivers when the payment for a total loss is less than the outstanding loan on their vehicle.

Not everyone with a new car needs GAP coverage, but if you owe a substantial amount on your lease or loan, GAP coverage could be a helpful form of protection that you won’t get with something like a full coverage auto insurance policy.

What is GAP insurance on an auto loan?

GAP insurance is an optional add-on coverage for people who have leases or loans on a vehicle. GAP coverage will reimburse a driver if their car is totaled or stolen and they owe more in the lease or loan than the vehicle is worth.

While GAP insurance coverage is helpful, it’s not typically necessary for very long. With GAP insurance, the insurance company repays the difference in value between the lease and the car’s actual value. Other standard car insurance coverage options won’t cover this cost.

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How does GAP insurance work?

Essentially, GAP coverage works as a way to protect you from your car’s depreciation. Cars lose value quickly once they’re driven off the lot. If you finance a vehicle, you will be on the hook for the difference between how much you owe on the vehicle and what the vehicle would be worth if it were totaled in a car accident. You can find out how much your car will be worth with a totaled car value calculator.

You cannot purchase GAP coverage on a liability car insurance policy. Instead, to qualify for GAP insurance, you must also have a collision insurance and comprehensive insurance policy. Most insurance companies consider this a full coverage policy.

Does GAP insurance cover what you owe?

Most insurance companies require anyone who leases a vehicle or needs a loan on a vehicle to carry a full coverage auto insurance policy. With full coverage, your vehicle is covered in the event of a car accident, and it’s also covered if your vehicle is damaged by inclement weather, vandalism, or something similar.

Check out the map below to get an idea of how much you may pay for full coverage insurance. It shows the average annual full coverage auto insurance rates for each state.

With collision and comprehensive coverage, you would still owe on a car loan if your vehicle were totaled. This is especially true if you have a substantial loan on a new vehicle that has depreciated in value.

However, if you have GAP coverage, your GAP insurance will cover the difference in what you owe and your car's worth.

Let’s say you finance a new vehicle for $35,000. If you’ve had the vehicle for a while, you could have paid around $8,000 toward the loan. But if you’re in a car accident and your vehicle is worth $25,000, but you owe $27,000, you’ll have to pay $2,000 out of your own pocket when the car is totaled.

This scenario highlights the benefit of GAP coverage on your vehicle.

When does GAP insurance not pay?

There are certain scenarios in which GAP insurance would not help to cover expenses:

• Auto insurance deductibles
• Overdue payments or late fees on loans and leases
• Security deposits
• Extended warranties
• Balances carried over from previous loans or leases
• Lease penalties
• Charges for credit insurance connected to the lease or loan
• A down payment for a new car

GAP insurance is very helpful but extremely specific in how it benefits a policyholder.

Do I need GAP insurance?

If you are upside down in the loan on your car, meaning you owe more than the car is worth, GAP insurance may make sense. Still, if the amount you owe is less than a few installments of GAP coverage, you may save more money by not investing in the coverage.

But GAP coverage could be extremely helpful if you are upside down in your loan or lease by hundreds or even thousands of dollars.

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Is GAP insurance worth it?

In most instances, GAP insurance is not a good investment. GAP auto insurance is not a wise investment if you do not have a loan, for example, or if the amount you owe on your loan is less than what your car is worth.

Essentially, you need to consider whether you can afford to pay the difference between your loan on your vehicle and what the car is worth. GAP insurance may not be worth it if the amount is small and you can afford to pay for it out of pocket.

But if you owe a good bit and you know you cannot afford to pay it all if your car is totaled, you should consider investing in GAP coverage.

When might GAP insurance make sense?

Investing in GAP insurance could be a good idea for you if you fall into one of these categories:

• You paid less than 20% down on the vehicle.
• You financed the vehicle for 60 months or more.
• You are leasing a vehicle.
• You purchased a vehicle that depreciates rapidly in value.
• You rolled over negative equity into your current loan.

In the examples above, GAP insurance could help protect you from paying thousands of dollars out of pocket.

When should I skip GAP insurance?

You do not need to carry GAP coverage on your vehicle under the following circumstances:

• You paid more than 20% down on the vehicle.
• You will pay off the loan in fewer than five years.
• The vehicle holds its value better than average.

In the instances above, GAP insurance is likely not a necessary add-on for your car insurance policy.

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Do I need GAP coverage with a full coverage policy?

Even if you have a full coverage policy that includes comprehensive and collision coverage, you will not be reimbursed if you owe more on your lease or loan than your vehicle is worth. So you may still need GAP insurance with a full coverage policy.

Do I have to get GAP insurance for a leased car?

Leased cars depreciate quickly, so GAP coverage may be a smart investment if you owe a good bit on your vehicle. Many leases require individuals to carry GAP insurance as a part of their auto policy, but even if you don’t have to, you may want to invest in GAP coverage.

The good news is you may not need the GAP coverage for the duration of your lease period. Instead, you only need to consider it when you would owe more on the vehicle than your lease or loan on that vehicle. So even if you get GAP insurance, you could drop it once you are in a safer financial situation.

How much does GAP insurance cost?

GAP coverage can cost as little as $20 per year, but the average cost is typically around $60 annually.

Many insurance companies offer GAP coverage, and the rates with each provider differ.

You could also purchase GAP coverage through the dealership, but dealers typically charge a flat rate for coverage that could cost a lot more. Most dealerships charge anywhere from $500 to $700 for a GAP policy.

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How can I get GAP insurance?

Typically, you can purchase GAP insurance until your vehicle is three years old. Still, some companies have requirements like the following:

• Your vehicle must not be older than two to three years.
• You must be the original owner of the vehicle.

The three best places to purchase GAP coverage are the dealership, an insurance provider, or individual GAP insurance companies.

GAP Coverage With a Dealership

GAP insurance may be automatically included in your loan or lease agreement when you buy your car from a dealership. However, you can ask whether it’s an option to remove this coverage if you’d like to purchase GAP insurance elsewhere.

You may decide later that you’d like to purchase GAP coverage through an insurance company. You’ll have to reach out to your dealership to see whether you can make this change to your contract.

GAP Coverage With Insurance Companies

Many different companies offer GAP insurance, including the following:

• Allstate auto insurance
• American Family auto insurance
• Auto-Owners auto insurance
• Erie auto insurance
• Liberty Mutual auto insurance
• Nationwide auto insurance
• Travelers auto insurance
• USAA auto insurance

Shop around and compare the costs of GAP coverage from different providers to learn which company offers the best price.

Do I need GAP insurance?

If you put less than 20% down on your new car, you may want to get GAP coverage. If you could end up upside down in your car loan, GAP insurance is a great way to protect yourself against paying a large sum out of pocket.

Vehicle Depreciation

The average vehicle depreciates by 40% after five years. If you consider your car’s depreciation of value into the loan that you owe, GAP insurance may be necessary.

Some vehicles depreciate more rapidly than others. Still, some cars hold their value longer. Depreciation could be an issue if you are in an accident and your vehicle is totaled. So consider this before opting out of GAP coverage.

What is replacement value insurance?

Replacement value insurance, or new car replacement, reimburses you for a new car of the same make and model rather than the car’s actual cash value if it is totaled. Depending on your situation, this coverage could work better for you than GAP coverage.

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Alternatives to GAP Insurance

If you’re not sold on GAP insurance, there are a few other options you could consider for protection if you have a loan on your vehicle.

New Car Replacement

As mentioned above, new car replacement insurance reimburses you for a new car of the same make and model rather than the car’s actual cash value if it is totaled. The following companies offer new car replacement:

• Amica auto insurance
• Farmers auto insurance
• Nationwide auto insurance

This could be useful if you don’t want to invest in GAP insurance.

Better Car Replacement

Better car replacement insurance reimburses you for a newer or better vehicle model if it is totaled. Better car replacement options often have mileage requirements. The following companies offer better car replacement:

• Horace Mann auto insurance
• Liberty Mutual auto insurance

Better car replacement coverage may work better for you, depending on the miles on your vehicle.

How do companies decide whether a car is totaled?

Each state has different rules to determine when a car is totaled. Essentially, if repairs to a vehicle would cost more than the car is worth, it is totaled. But where you live will determine when and how your vehicle is totaled.

If you're in an accident, your car could be totaled without warning, so it’s good to prepare for that possibility just in case.

What are the pros and cons of GAP insurance?

There are some benefits to a GAP insurance policy:

• Financial security, so you don’t end up paying out of pocket
• Peace of mind when you owe on a car loan

Still, GAP coverage can have its drawbacks:

• A costly investment in coverage you may never need
• A coverage that loses its value over time

If you invest in GAP insurance, pay attention to your car loan and drop the coverage once you owe less on your vehicle than your vehicle is worth. Otherwise, you could end up wasting money on coverage.

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GAP Insurance: The Bottom Line

If you have a loan on a new car, and your loan costs more than your car is worth because of depreciation, you may want to consider GAP insurance.

GAP coverage offers peace of mind so you won’t end up paying hundreds or thousands on your loan if your car is totaled in an accident. Still, there are plenty of instances where GAP insurance is unnecessary. So don’t purchase the coverage unless you know it would be beneficial.

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