What Is Gap Coverage and Gap Insurance?

Gap insurance works in conjunction with your standard auto insurance policy for leased or financed vehicles. When your car is declared a total loss due to an accident or theft, your regular auto insurance pays only the current market value of the vehicle. If you owe more on your loan than this amount, gap insurance covers the remaining balance.

Let's say you bought a car two years ago and still owe $20,000 on your financing agreement. Due to depreciation, your car's actual cash value is now $15,000. If your vehicle is totaled, your standard auto insurance will pay $15,000, minus your deductible. Gap insurance will then cover the remaining $5,000, preventing you from paying that difference out of pocket.

To file a gap insurance claim, you must first submit a claim with your auto insurance company. Once they determine the vehicle is a total loss and provide a settlement amount, you can file a gap insurance claim for the remaining balance.

Gap insurance specifically covers the difference between your loan balance and your car's depreciated value in total loss situations. This includes coverage when your vehicle is stolen and not recovered. While gap insurance isn't mandatory, it may be required by your financing agreement. You should carefully review the terms of your car loan to see if you need this coverage. It's important to understand what gap insurance doesn't cover to avoid misconceptions about this protection.

Gap insurance won't cover the following:

• Regular car payments if you experience financial hardship or job loss
• Vehicle repairs from accidents or mechanical issues
• Your car's value or loan balance after repossession
• Down payments on a new vehicle
• Extended warranty costs
• Any remaining balance from previous car loans

Several factors determine whether gap insurance will benefit you. If you've made a down payment of less than 20% on a new car, you'll likely need this coverage. If your auto loan term extends beyond 60 months, gap insurance provides valuable protection during those early years when your loan balance exceeds the car's value. Gap insurance is most beneficial in the early years of car ownership when the difference between your loan balance and your car's value is greatest. As your loan balance decreases over time, you should periodically reassess whether you still need this coverage.

Leased vehicles often require gap insurance as part of the lease agreement. Gap insurance becomes more important if you've purchased a vehicle known to depreciate quickly or rolled over negative equity from a previous car loan.

Answer the following questions to determine if gap insurance is right for you:

• Is your car loan term longer than 48 months?
• Was your down payment less than 20% of the purchase price?
• Are you leasing your vehicle?
• Does your car model have a history of rapid depreciation?
• Do you drive more miles annually than average?
• Did you include negative equity from a previous car loan in your current financing?

If you've answered yes to any of these questions, consider getting gap insurance. High mileage and rapid depreciation can significantly impact your car's value, making gap insurance more valuable in these situations.

The cost of gap insurance varies based on several factors, including your state of residence, driving record, vehicle type, age, and other personal factors. When purchased through an insurance company, gap coverage typically adds about $20 annually to your premium, or roughly 5%-6% of your collision and comprehensive coverage costs.

Dealerships often charge significantly more for gap insurance, with prices ranging from $400 to $700. This substantial price difference makes it worthwhile to compare options from various providers. Although the coverage usually remains active until your loan balance falls below the car's value, you should verify the specific terms of your policy.

To make an informed decision about gap insurance, start by reviewing your current auto loan details and contact your auto insurance provider to learn about adding gap coverage to your existing policy. Compare quotes from multiple insurance providers, as prices can vary significantly. Read all policy documents carefully before purchasing. You should also review your need for gap insurance annually as your loan balance decreases.