Gap insurance pays the difference between the value of your car and the amount you owe on a loan or lease. It's an optional coverage that can be added if you buy comprehensive and collision insurance.

If your car has major damage from a car accident, your insurance company might decide your car is a total loss. That means the insurer won't pay to fix it but instead will pay you the value of the car if you have collision and comprehensive insurance.

Cars are considered "totaled" when the repair cost is more than a certain percentage of the vehicle's value. In many states a car is "totaled" when the damage is greater than 75% of the car's value at the time of the accident.

Who needs gap insurance?

You may want gap insurance if:

  • You have a large balance on your car loan. For example, if you made only a small down payment or have a long loan term, you likely have a large loan balance. The average car loan is $30,234 and the average loan term is almost 69 months, according to a 2017 report by Experian.
  • You lease your vehicle.
  • You have a vehicle that depreciate faster than the average. The average new car depreciates by 16.9% in the first year, according to ISeeCars.com. The vehicles with the fastest depreciation (more than 36% in the first year) are the Cadillac CTS, Hyundai Genesis and Smart Fortwo.

Websites such as Edmunds, Kelley Blue Book and NADAguides and have tools to estimate vehicle value. Your insurer may use its own resources.

You don't need gap insurance if the balance of your car loan is less than the value of your vehicle.

 

Car depreciation over 5 years

 

Examples of how gap insurance works

You sideswipe a fence, causing major damage to your car You'd make a claim on your collision insurance for your totaled car. The payout will be the value of the vehicle. Gap insurance pays the difference between the value and the balance of your car loan or lease.
You hit a deer, causing major damage to your car You'd make a claim on your comprehensive insurance for your totaled car. The payout will be the value of the vehicle. Gap insurance pays the difference between the value and the balance of your car loan or lease.
Your vehicle is stolen and not recovered You'd make a claim on your comprehensive insurance for the value of the stolen car. Gap insurance pays the difference between the value and the balance of your car loan or lease.
Someone else hits your car, causing major damage You'd make a claim on that person's liability insurance, since it's their fault. Their insurance company will pay you the value of your totaled vehicle. Gap insurance will pay the difference between that check and the balance of your car loan or lease.

Where to buy gap insurance

Gap insurance and similar products are available from:

  • Car loan providers: Your bank or car dealership may offer gap insurance or similar coverage when you take out a car loan. State Farm Bank offers a policy called Payoff Protector, for example. The cost is added to the amount of your car loan, will incur interest, and will be folded into your monthly payments. The cost of the gap insurance will last the life of the loan, meaning you may be paying for something you no longer need once the loan balance is lower than the value of your car.
  • Insurance companies: Some insurers sell gap insurance when you buy car insurance with collision and comprehensive coverage. It may be called auto loan/lease coverage, depending on the insurance company. Esurance, Nationwide and Travelers sell gap insurance, for example. Loan/lease coverage pays a percentage of your car's value (often up to 25%). If your car is worth $24,000, a 25% loan/lease policy would cover $6,000. If you purchase loan/lease coverage, make sure the percentage is enough to cover the difference between the amount you owe and the value of your car.
  • Companies selling stand-alone gap insurance: Some companies specialize in gap insurance, such as GapDirect.

Gap insurance cost

Gap insurance is relatively inexpensive. If you buy it from your insurance company it typically costs about $20 a year, according to the Insurance Information Institute.

If you buy gap insurance through a car dealership, there's typically a flat fee of $500 to $700, according to United Policyholders, a consumer advocacy group.

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