Everything You Need to Know About Gap Insurance Coverage

by Agnieszka Fratczak,  Nov 25 2020

Shopping around for an auto loan, refi, or even a new vehicle lease? Then you have probably come across gap insurance coverage.

This policy might not be one you’ve heard of before. Depending on your new car and what you owe, though, it might be one of the most important products you could buy.

What is GAP Insurance?

Gap insurance — also referred to as an acronym of Guaranteed Asset Protection — is a type of car insurance designed for drivers who still owe on their vehicles. Whether you have an auto loan (original or refinanced) or are leasing, buying a gap insurance policy is worth considering, especially if there is a chance of ever owing more on your vehicle than it is actually worth, which can often happen with new cars purchased from the dealership. 

After some accidents, the at-fault insurance company may deem your vehicle “totaled.” This means that it would cost more to complete the proper and necessary repairs than the vehicle is worth, so they are instead willing to simply pay you for the car’s value.

If you owe more to the bank than your totaled car is worth, though, there will still be a debt owed… which you may or may not be able to cover unexpectedly. This is where gap insurance coverage will step in.

How Gap Insurance Works if You Total Your Car

Let’s say your vehicle was totaled in an accident. If the other driver is at fault, their liability insurance policy would cut you a check for the value of the vehicle; if you are at fault and have collision coverage, your car insurance company would do the same.

A problem that arises, though, is if you have negative equity in that vehicle at the time of the accident — otherwise known as being “upside down.” In this case, the check you receive for the value of your car won’t actually cover what you still owe to the bank.

Instead, you would have to cover the difference out of your own pocket. Depending on how much negative equity you hold, this might mean making a significant payment to your lender (which you may not be able to cover), all while also looking for a new car you can afford at the dealership. If you sustained any injuries or missed work due to your accident, or have a high deductible to cover from an at-fault accident, this could further compound the financial strain. 

If you had gap insurance, though, you would be protected for your full auto loan amount. The policy would kick in to cover the difference between what the insurance company offers for your totaled vehicle and what you actually still owe the bank. Whether that delta is $5 or $15,000, you’re covered, and you won’t need to dip into savings to make that final loan payment.

Who Does GAP Insurance Cover?

As the name implies, GAP insurance is intended to cover the delta — or gap — between what you owe and what your totaled vehicle is worth. This coverage is especially important for borrowers who opt for:

  • a small down payment
  • long car loan terms
  • a very high interest rate
  • low monthly payments on their auto loan
  • an auto lease (gap coverage is sometimes included in your lease agreement)

That’s because the depreciation on their vehicles often happens at a faster rate than the pay-down of their loan balance.

This means, though, that gap insurance is only designed for drivers who still owe on their vehicles. If you own your car outright and don’t carry an auto loan, this coverage serves no purpose for you. That’s because there cannot be a “gap” for the coverage to fill.

Do I Need GAP Insurance if I Have Full Coverage Auto Insurance?

You might be wondering to yourself, Is buying GAP insurance worth it, especially if I already pay for full coverage auto insurance? Well, if there is a chance of you ever being upside down on your auto loan — regardless of auto insurance coverage — you need to consider a gap policy.

Your insurance company will pay for your vehicle if you have collision insurance and you’re in an at-fault accident. You’re also covered if the car is a total loss in some other way (stolen, vandalized, etc.) and you carry a comprehensive policy. However, the amount you’ll receive from your auto insurance company will only be what the vehicle is worth. If you owe more than that to the bank, you’ll still be responsible for the difference.

Gap insurance coverage will protect you regardless of the type of total loss you endure, if you owe more than your car’s value.

Is GAP Insurance Worth the Money? Won’t the Insurance Company Just Cover Me?

Can you afford a sudden auto loan payment that could potentially be thousands of dollars? Can you afford that plus your auto insurance deductible? What if you are unable to work at the time due to an injury from an accident?

If there are any concerns as to whether your current savings could float you and your family following a bad accident — regardless of fault —  it’s worth looking into gap insurance. This is especially true if your vehicle is likely to depreciate quickly or you have a lengthy loan term, putting you in a dangerous negative equity situation.

For only a few dollars a month, you can protect yourself and your bank account with gap coverage. And to most of us, that peace of mind is well worth the money.

Editorial content on is not written by a licensed insurance agent. It is intended for informational purposes only and should not be considered legal or financial advice.

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