What does gap insurance do?
Gap insurance coverage protects you if your car is totaled out (or stolen) and you owe more than it’s worth to your lienholder.
Gap insurance will pay the difference between the actual cash value of your car at the time of the loss, less the applicable deductible (and the vehicle's salvage value if retained by the owner or insured), and any greater amount owed on the vehicle to a lienholder at the time of loss.
To buy this coverage, you must have collision coverage and comprehensive coverage as part of your car insurance policy. The actual cash value of your vehicle needs to be paid out by an insurer in order for your gap coverage to pay out (to your lienholder) the remaining amount due on your financed vehicle.
Gap insurance can be purchased from dealerships, financing institutions, some car insurance companies and stand-alone gap insurance providers. Usually it is cheapest if obtained through a car insurance company, so if your car insurance provider doesn’t offer it see if your state’s insurance regulator has a list of companies that are authorized to sell gap insurance, such as the list the Texas Department of Insurance provides for its motorists.
Gap insurance doesn’t cover any unpaid finance charges, excess mileage or wear and tear charges, any other charges or miscellaneous expenses associated with the loan or lease.
It is also referred to as Guaranteed Auto Protection, Guaranteed Asset Protection, GAP, Loan/lease gap (LLG) or Loan/Lease Payoff. (See the most common questions about gap insurance.)
Is gap insurance mandatory?
It is an optional coverage. Neither gap insurance nor loan/lease payoff is required by any state, but if you have a loan or lease on your vehicle, then your financing institution may require that you carry this coverage (especially for leased vehicles).
What happens if I don’t have gap insurance?
If you owe more than your financed vehicle’s actual cash value, then you will be left personally responsible for the difference between the actual cash value paid out by the insurer and the balance of your lease or loan if your car is in a total loss situation without gap insurance coverage.
If your car isn’t financed or the amount you owe to your lienholder is less than the value of your vehicle, then gap insurance coverage isn’t necessary.
We agreement with the recommendation by the Utah Department of Insurance that if you find that gap insurance is right for your situation, you should read and understand any gap insurance policy before buying it.