What is Gap Car Insurance and How Does it Work?

If you total your vehicle, GAP (Guaranteed Auto Protection) insurance pays the difference between what the auto insurance company says the wrecked vehicle is worth and what the driver owes on their auto loan. This only applies if your car is declared totaled by your insurance company. It covers the costs of your car's depreciation as well as what you still owe.

Consumers who finance a car should think about GAP insurance if they don't want to end up with a large bill for paying off their vehicle. Simply put, if someone owes more on a car than the auto insurance company believes it is worth, the policyholder must pay the difference. Given how quickly the value of a car depreciates, consumers may have to pay a large sum of money for a totaled vehicle.

According to Frank Darras, an insurance attorney in Ontario, Calif., many consumers with car loans are "underwater," meaning they owe more than the car's value. Darras estimates that less than 10% of drivers have GAP insurance.

"People just don't have a lot of cash in this economy, and they need something to drive," he says. "The last thing they need is a two-by-four in the face because they drive it and end up owing thousands of dollars."

Mark McLaughlin of Davenport, Iowa, is glad he purchased GAP insurance when he purchased a sleek silver Camaro a few years ago. McLaughlin was taken aback when the car was vandalized by neighborhood kids just months after he purchased it. The kids destroyed the car by repeatedly hitting it with metal baseball bats.

"I never expected my car to be vandalized," McLaughlin says. "Without GAP insurance, I would have had to pay at least a few thousand dollars on my old car, as well as make payments on my replacement vehicle."

Here are eight questions you can ask yourself to get a grip on GAP:

Where Can I Get GAP Insurance?

  • According to Sarah Holtrup, an insurance agent in Indianapolis, GAP insurance is made available to a consumer when he purchases a car from a dealership.
  • If a customer wants to purchase a GAP policy after he has owned the vehicle for a while, he should contact the dealership, according to Holtrup. Most auto insurance companies do not provide this type of protection.

How Much Does GAP Insurance Cost?

  • A typical gap car insurance policy ranges between $400 and $700 for the life of the loan.
  • A policy typically costs less than $1 per day or as little as $1 per month for the duration of the loan.

The cost of GAP insurance will vary depending on the length of your auto loan, as well as the dealer, lender, and state. GAP coverage can be added at the dealership or through an auto insurance company.

When you buy a car, GAP insurance payments can be rolled into your loan, giving you the option of paying for the coverage monthly rather than all at once. According to Allstate, the option typically costs between $500 and $700 once interest is added to the loan. If you trade in your vehicle or pay off your loan early, Allstate says you can request a refund of any remaining GAP payments from the dealership.

GAP coverage is typically calculated as 5% of your deductible by auto insurance companies. According to the Insurance Information Institute, if your collision and comprehensive costs are $500, GAP insurance will add about $25 to your annual premium.

GAP insurance is intended to cover the life of the vehicle loan — when there is no longer a "gap" — and can cost as little as $125 for a five-year loan. And you don't have to buy it right away when you buy a car. According to Edmunds.com, some insurance companies will sell coverage up to 12 months after the purchase or after you've driven up to 15,000 miles.

Is Gap Insurance Worth It?

According to Allstate, most GAP policies cover new and used vehicles worth up to $100,000, losses up to $50,000, and insurance deductibles of up to $1,000.

GAP insurance is recommended by the Insurance Information Institute for anyone who is in one or more of the following situations:

  • If you make a down payment of less than 20%.
  • If you finance a car loan for more than 60 months.
  • If you roll a previous auto loan into the new loan.
  • If you buy a vehicle that depreciates quickly, such as a budget-friendly compact car for less than $15,000 or a vehicle from a struggling automaker. Because they are more difficult to resell, these vehicles depreciate quickly.

What Does Gap Insurance Cover?

  • A GAP policy may limit the dollar amount of coverage in some cases, such as a $4,000 cap.
  • According to Holtrup, a GAP policy does not cover missed loan payments or late fees.
  • According to Darras, most GAP policies do not cover a driver's auto insurance deductible.
  • According to Holtrup, if someone purchases GAP insurance and then refinances their auto loan, the GAP policy becomes null and void. In this case, Holtrup advises a driver to contact his GAP insurer and consider purchasing another policy.

What Does Gap Insurance Not Cover

Customers frequently have misunderstandings about what GAP insurance covers. It does not cover the following situations:

  • If you lose your job or become disabled, you must repay the loan.
  • Repairs are reimbursed if your car is damaged but not totaled in an accident.
  • If your vehicle is damaged in an accident, you can rent a car.
  • Covering the difference between what your car was worth before the accident and what it is worth after it has been repaired.

Do I Need Gap Insurance on my Vehicle?

  • Anyone who is "underwater" on a car loan should think about getting GAP coverage. Customers can purchase coverage before or after purchasing a vehicle.
  • Darras says that someone who bought a car with less than a 25% down payment is frequently underwater on the loan. Someone who has a car loan with an interest rate of 6% or higher and has financed the car for more than three years is also likely to be underwater.
  • A car's value can be determined by visiting the Kelly Blue Book website (www.kbb.com) or the National Automobile Dealers Association website (www.nada.com).

Do You Need Gap Insurance for New Cars?

  • Automobiles depreciate rapidly. Even with a new car loan, the consumer is likely to owe more than what the insurance company would pay if the car was totaled. Progressive, for example, notes that if you take out a loan for the full cost of a $28,000 car and are involved in a crash a few weeks later, your auto insurance company may only pay $24,500. That means the consumer must pay his collision deductible as well as $3,500 to the lender if the vehicle is totaled.

Should I Buy Gap Insurance for a Leased Vehicle?

  • According to Lynne McChristian, the Insurance Information Institute's Florida representative, anyone leasing a car should consider GAP insurance. According to her, the cost of GAP insurance is sometimes rolled into lease payments.
  • According to McFarlane, certain states, such as New York and North Carolina, require residents who lease cars to purchase GAP insurance. According to insurance experts, GAP insurance for leased cars can be less expensive, but costs can vary.

Will GAP Car Insurance Cover My Auto Loan?

GAP car insurance is optional, but it will pay off your auto loan if your car is stolen or completely totaled and you owe more than the car's value. It can be extremely useful if you find yourself in that situation.

Which States Offer GAP Car Insurance?

  • According to McChristian, GAP insurance is not available in some states, including Connecticut, Louisiana, and Virginia. She advises consumers to check with the state where they live to see if GAP is available.

Our Insuroma experts can assist you in locating the appropriate insurance coverage and guiding you through the process.