Gap Insurance

Last Updated :

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Blog Author :

Nanditha Saravanakumar

Edited by :

Alfina L.

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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What Is Gap Insurance?

Gap insurance (Guaranteed Asset Protection) is optional auto insurance coverage that financially supports car owners when the compensation amount received is lesser than the car's worth or what is owed by the car owner to the bank. This insurance is particularly helpful when a vehicle gets stolen or totaled.

Gap Insurance Meaning

It covers the difference between the car loan amount and the present car value. Though auto insurance is mandatory, gap insurance is not. The latter developed from the former's inability to cover complete losses in times of peril. Car owners must pay a monthly or annual premium for car gap insurance like any other insurance policy.

Table of contents
  • Gap insurance, also known as loan/ lease coverage, is a secondary auto insurance cover that insures car owners against the difference in the insurance claim and the loan amount.
  • The term gap means Guaranteed Asset Protection and refers to the gap in the comprehensive coverage to fund the negative balance between the car's value and loan amount.
  • A loan/lease coverage can reduce the liability of an individual who would otherwise have to pay out of pocket.
  • Policyholders can cancel the coverage anytime or when the balance becomes zero or positive.

How Does Gap Insurance Work?

Gap insurance works similarly to a normal collision or comprehensive coverage, except that it acts like an addition to the latter. Mandatory auto insurance normally only covers up to the extent of the loss. In cases of total loss, like when a car is stolen or totaled, the claim amount equals the car value at the time of the accident or theft.

But in cases where the existing car loan amount is more than the insurance claim, the car owner will have to pay the balance loan amount from their savings. So, in the end, the person is left with liability for a car loan and no car.

Most car insurance companies offer gap insurance policies to car owners. Some prominent examples include Allstate, Nationwide, Erie, Travelers, Auto-Owners, etc. The average annual cost of these companies averages from around $30 to $50. The Shelter offers the most expensive coverage at $141.

Some insurance companies even offer optional coverage like new car replacement coverage, repair provision coverage, and loan/ lease coverage as a single package.

According to Forbes, the average gap insurance cost is $60 annually. However, the Insurance Information Institute estimates it is possible to get auto gap insurance for $20.

Car owners can buy a loan/lease coverage if the loan amount is high or the car is expensive. Car insurance companies, car dealerships, and banks sell auto gap insurance. But it is better to buy from insurance companies to get an assured maximum refund at a lesser premium.

Gap Insurance Coverage

A car gap insurance cover would be appropriate under the following conditions:

  1. If the brand or car's value depreciates faster than others.
  2. If negative equity from a previous car loan was rolled into a new or existing car loan.
  3. The car loan was taken for five years or more.
  4. The owner financed most of the car, i.e., from savings instead of a loan.
  5. The owner paid a down payment of less than 20%.

That said, there are some instances gap insurance doesn't cover. For example, the insurance deductibles paid by the owner, payments overdue on loans, balances carried over from previous car loans, and any penalties or fines related to the car or loan payment.

A single insurance policy covers expenses only related to one car. However, the provision to roll the insurance cover benefits those who wish to sell a car and buy a new one, both having car loans. If not, they can cancel the insurance and apply for a gap insurance refund.

Mostly, people cancel their policy when the loan amount drops to the car's present value. In such a case, their comprehensive cover will be sufficient to pay off the loan.

Example

Consider this example to get a better idea of the concept. Jane borrowed $20,000 from her bank to buy a car. A year later, the car got stolen. The insurance company compensated her with only $17000. So she had to pay back the $3000 to her bank from her savings. But, suppose she had a gap insurance coverage, she would have received the balance of $3000.

Therefore, she would have to pay a monthly or annual premium for the coverage and can enjoy a reimbursement in the case of a scenario like the one depicted above.

Frequently Asked Questions (FAQs)

1. Is gap insurance worth it?

Car gap insurance depends on the existing loan liabilities and the car's value. For instance, a person might be highly likely to take a second coverage if the car is expensive and new.

2. How much is gap insurance?

Like other insurance policies, car owners having a second coverage will be required to pay a premium, along with the collision or comprehensive coverage. Gap insurance costs can be as low as $20. Forbes estimates the average annual premium at around $60.

3. Where to buy gap insurance?

There are three car owners to buy loan/ lease coverage options: car insurance companies, car dealerships, banks, or credit unions. However, car insurance companies might be the best option, concerning the cost.

4. How to cancel gap insurance?

Policyholders usually cancel their loan/ lease coverage when the existing loan liability is lesser than or equal to the car's worth. Or, if they are buying another car, they can roll the insurance to the new car. They can apply for a gap insurance refund with their insurance company or dealership.