Gap insurance, also known as loan-lease payoff coverage, can provide valuable protection during the early years of your car's life if you have a loan or a lease.
If a loss occurs, gap car insurance will pay the difference between the actual cash value (ACV) of the vehicle and the current outstanding balance on your loan or lease. Sometimes it will also pay your regular insurance deductible.
If your vehicle has been totaled by a covered peril, such as an accident, theft, fire, flood, tornado, vandalism, or hurricane, your insurance company will pay you the actual cash value for your car, if you have comprehensive and collision insurance. This amount is often considerably less than the actual amount you still owe on your loan or the amount due for a lease payoff.
When the amount of your ACV payout is less than what you owe on your lease or loan, the loss from this financial shortfall is the "gap" you can be left owing.
This is how a "gap" occurs (using fictitious numbers):
- You choose a car that costs $25,000 and you drive it off the lot.
- After paying the down payment you owe $24,000 in car payments over five years (0% interest loan = $400 car payments).
- You purchase physical damage insurance (comprehensive and collision) with a $500 deductible to protect you against damages and loss.
- You have an accident while you are still upside down on your loan or lease (meaning you owe more on a car than it's worth) and your vehicle is totaled out.
- The insurance company determines that the actual cash value of the car is only $22,000, but at the time of the loss you still owe $23,500.
- Gap insurance should pay the difference plus your deductible, totaling $2,000. (Note: not all gap policies pay the deductible).
Here are the line items:
- Loan payoff at the time of accident: $23,500
- Vehicle's actual value at the time of accident: $22,000
- Your deductible: $500
- Physical damage insurance pays: $21,500 ($22,000 minus $500 deductible)
- Gap insurance pays the difference between what is owed and what the physical damage insurance company pays (plus your deductible): $2,000
Many car owners don’t take into account the depreciation that takes place with a new car. Within minutes of driving off the lot, a new car can be worth 10 percent less than what you just paid. In our example above, if you owned the car for three days, had physical damage coverage and the car was totaled, you could owe 10 to 20 percent of the $24,000 ($2,400 to $4,800 out of your pocket) even though you purchased "full coverage."
Car owners often assume that if their car is totaled, it will be replaced at the amount they paid, or at least the amount they owe. This is not so. That is why many car insurance companies offer gap insurance (loan/lease payoff insurance) as an optional coverage that is available with physical damage coverage. Typically, a stand-alone gap policy is sold by a car dealer at a higher cost.
How much does gap insurance cost?
If you purchase gap insurance from a car insurance company, it typically costs about $20 a year, according to the Insurance Information Institute, a trade group. Most insurers will add gap insurance to your comprehensive and collision coverage, so you'll usually have to buy that coverage as well.
Buying gap insurance from a lender or dealership is much more expensive. Lenders typically charge between $500 and $700, according to United Policyholders, a non-profit consumer advocacy group.
Can I get gap insurance without primary insurance?
Even if you get gap insurance, you still need your state's minimum auto insurance coverage (the insurance coverage the police check for if you are stopped and asked for your insurance card), because gap insurance isn’t catch-all coverage.
While most states require you to have certain car insurance coverages, typically at least bodily injury liability and property damage liability, for your gap insurance to be in effect you need to carry physical damage coverages of collision and comprehensive on your vehicle as well. This "full coverage" of liability and physical damage coverages is also normally required by your lien holder.
Does a late car payment void out gap policy?
No. Being late with your car payment won’t void out your gap insurance policy.
Getting behind on your car loan doesn’t automatically cancel out your gap insurance, but it does mean that if you total your vehicle before you catch up, your gap insurance won’t pay out for the late payments.
Gap insurance usually pays out the difference between your wrecked car’s ACV and the remaining balance due to your lien holder on your car loan. But there are exceptions and conditions to gap policies for certain items, such as late car payments.
If you have overdue payments or were granted a payment holiday so that some payments were moved to the end of your loan, this amount wouldn’t be covered by your gap insurance policy. If had you paid on time these monies would not have been due at the time of the total loss.
Will gap insurance kick in if the car is declared a total loss but your claim was denied, or worse, if the primary insurance wasn't active at the time of the accident?
No, gap insurance will not cover your car if it's declared a total loss but your claim is denied for coverage or if you did not have primary insurance coverage on the vehicle at the time of the accident.
Can I purchase gap insurance on a used vehicle?
Yes, typically you can. State laws and insurance companies’ guidelines vary, but there are gap policies that are available for used cars that are financed. Gap insurance is beneficial when the value of a vehicle, whether new or used, depreciates while you still owe money on the loan or lease.
Can I get gap insurance on a loan that is not specifically used for a vehicle like a Home Equity Line of Credit (HELOC)?
You cannot get gap insurance for lines of credit that may be used for purposes other than a vehicle. Gap insurance doesn’t work with mortgage loans, credit lines, balloon payments or other types of non-vehicle specific loans.
If you have used money from your Home Equity Line of Credit (HELOC) to purchase your vehicle, gap insurance would not cover this type of loan since the HELOC is not specifically to be used for a vehicle loan.
With this loan type the gap insurer would have to use your accounting of what was used for the vehicle and what was still due on the line of credit for it and what was used for other items and what you had paid back already, etc. Your accounting of what is due is not a risk a gap insurer is going to take on.
Gap insurance is normally only able to be purchased and used when you have received your money through a conventional auto loan or lease to obtain your vehicle.
Can I buy gap insurance for a car that I bought if a private person is holding the loan?
Gap insurance providers won’t offer coverage if your loan is through a private individual instead being a structured loan from a proven financial institution, such as a bank or finance company.
When dealing with a bank or finance company, the gap insurance carrier knows the terms, sees the paperwork, etc. With a private party loan it is hard for the gap carrier to be assured that the loan is only for the vehicle, payments were made properly, etc. – all things that an insurer requires.
Is gap insurance an acceptable proof of insurance at the DMV or for police?
Gap insurance isn’t accepted by any Department of Motor Vehicles as proof of insurance. It’s not the right type of insurance needed to show financial responsibility when you are going to register, or renew registration, on your vehicle.
Showing proof of gap insurance to law enforcement wouldn’t help if they ask you for proof of insurance. Gap insurance is optional coverage that only helps you out in a total loss situation, it doesn’t provide the state-mandated liability coverage that police want to verify that you have on your vehicle.
If I bought my car outright, do I need gap insurance?
If you bought a car with cash and thus did don’t have a lien holder due to there being no loan or lease on the vehicle, then there would be no reason for you to obtain gap insurance. Gap insurance is for when you owe more than the value of your vehicle. If you have the car paid off and it’s no longer financed, you don’t owe anymore more than the car is worth, and so there would be no payout from gap insurance.
Am I due a refund on part of my gap insurance if I pay the car off or trade it in?
If you financed your vehicle and the gap insurance is part of your vehicle's financed monthly payment, then it is doubtful that you would receive any refund for your gap insurance. That is because when the coverage gets paid for monthly -- as part of your financed monthly payment -- then the coverage is used that same month.
If you paid for your gap insurance policy in full, then you will need to contact the company that sold you the policy to see if there is any unused premium that should be refunded back to you when you trade in or pay off your car.
Can you buy gap insurance anytime? How long do I have to buy gap insurance?
Gap insurance providers' terms and guidelines differ; in general gap insurance is available on new, used and refinanced cars, trucks and SUV’s leased, purchased or refinanced within the past 12 months. So if you know within the year after financing, leasing or refinancing your vehicle that you owe more than its actual cash value (ACV), then gap insurance could be beneficial for you to purchase.
Is gap insurance transferable from one vehicle to another?
Gap insurance cannot be transferred to a different vehicle or loan. If you are trading in, selling, or buying a new vehicle, you will need to get a new policy to cover the newly financed vehicle.
Is gap insurance transferable after a refinancing?
Gap applies to a specific loan or lease and typically is non-transferable. If you already had a gap policy in place, that gap insurance would normally be voided out when you refinance a vehicle -- you would need to get a new gap insurance policy on it.
If I paid a high down payment, do I need gap insurance?
If you put down a decent down payment, your vehicle depreciates at a steady pace, and you are paying down the balance of the loan each month, then typically you wouldn’t need gap insurance coverage.
Gap insurance is only needed if you have negative equity in your car (owe more than the value of the vehicle) since this coverage only pays for the balance of the loan left after the ACV is paid out when your car has been found to be a total loss by an insurer. If you owe less than the value of your vehicle, then save your money; you don’t need to buy gap coverage.
Does gap insurance come with a deductible?
No, gap insurance does not normally come with a deductible attached to it.
Will gap insurance pay your physical damage (collision or comprehensive coverage) deductible?
The answer depends upon your gap insurance policy. Some policies pay the deductible and some don't. When gap insurance pays the primary insurance deductible amount, the deductible amount is not actually reimbursed back to you. Rather, the primary insurance deductible is taken from the payout of your totaled vehicle and covered as part of your unpaid loan balance, which gap insurance pays.
Is gap insurance required by law?
While gap insurance is good to have if you owe more on a vehicle than its value, it isn’t required by any state law for you to have as part of your car insurance policy.
Gap insurance is optional coverage; however, it’s not uncommon for lease contracts to have gap insurance included in them. Sometimes it's referred to as auto loan/lease coverage or loan/lease payoff coverage.
If a lender of leased cars requires gap insurance to be purchased, then they must include the gap insurance within the cost of the lease itself. This means that the monthly price quoted by the dealer must include gap insurance when they mandate you carry this coverage.
There are some financial institutions that may want you to have gap insurance as part of your auto insurance policy on the car you are purchasing. If this is the case, your loan or lease papers should note this.
If you have declined gap insurance, a dealer shouldn’t be able to add it on to your loan amount or charge you for it in another way. Even though gap insurance may be helpful to you, if you owe more on the vehicle then its ACV and were to be in an accident, you should have the right to turn down this coverage and thus not be charged for it.
For example, the California Car Buyer’s Bill of Rights requires disclosure of the price of items commonly packed into loans, such as theft etching on windows and other car parts, gap insurance, or extended service contracts.
In general, dealers anywhere should provide car buyers with an itemized price list for all these items, such as warranties and insurance, etc., if the items are being financed.
If you have a charge for gap insurance from your lender and don’t have this coverage, discuss the matter first with the financing company that added into your payment. Unless you signed paperwork stating that you would add gap coverage to the car at the time of purchase as part of your finance or purchase agreement you should be able to decline it and get a refund.
If you don’t want gap insurance and have problems getting it removed, try contacting your state agency's consumer division. The office of the insurance regulator should be able to help you.
What is a gap waiver?
A gap waiver is different in that it is an agreement under which the creditor agrees to waive the lessee or debtor’s obligation for the difference between the "gap amount" and the actual cash value of the property. On a leased car, the cost of gap insurance or waiver is generally rolled into the lease payments.
Can I cancel my gap insurance?
Yes, usually you can cancel gap insurance if you determine that you no longer need it.
Gap insurance policies, terms and fees vary. To find out about how to cancel your existing gap insurance policy, you’ll need to read through the contract you have with your gap insurance provider. If you still have questions, contact the insurer directly.
If you just purchased the policy, depending upon your gap insurance company, it may be possible that if you cancel within a certain time period (typically 30 days) you can receive a full refund. A cancellation fee may apply.
After that initial period, if you cancel the policy you normally will receive a refund prorated according to the length of time that you kept the policy in effect. You can’t get a full refund since you’ve “used” a portion of it already.
Also, any refund would be due you only if you had paid in full upfront for the gap insurance policy. If your gap insurance coverage were set up so that you paid a monthly amount for it (for instance, included in with your monthly car loan), then you should still be able to cancel the gap policy, but you shouldn’t expect a refund since the portion you paid each month would have been used in that month already.
If you’re still upside-down on your car’s loan (owe more than it’s worth), then gap insurance is likely still needed. If you now owe less than the car's ACV, you could cancel your gap insurance since it would not pay out if your car were totaled out by an insurance company after an accident.
If you no longer want your current gap insurance policy because you believe you paid too much for it, then shop around to see if a cheaper policy is possible. If it is, then see about canceling out your current one before buying the new one.
If you bought your gap insurance through a dealership or finance company, then it is quite possible that you could find a policy with a credit union or auto insurance company for much less. We recommend shopping around for gap insurance, just as you should for the car insurance policy for a new car.
What isn't typically covered by gap insurance?
Gap insurance usually won’t pay for:
- Overdue lease/loan payments
- Costs for extended warranties, credit life insurance, or other insurance purchased with the loan or lease
- Carry-over balances from previous loans or leases
- Financial penalties imposed under a lease for excessive use
- Security deposits not refunded by the lessor
- Amounts deducted by the primary insurer for wear and tear, prior damage, towing, and storage
- Equipment added to the car by the buyer, meaning that only factory-installed equipment is covered
- Mechanical issues, such as engine or transmission failures, or any other car problems that are not losses covered by your car insurance policy.
When did gap insurance start?
Gap insurance began to be offered in the early 1980s to help those insured who purchased a car and due to rapid depreciation of the vehicle found themselves owning more than the car was worth if it was in a total loss situation.
The higher price of motor vehicles, longer-term auto loans, and the increasing popularity of leasing in the 1980s is what created gap protection as a type of insurance for car owners.
What does gap, sometimes referred to as GAP, stand for?
GAP stands for Guaranteed Auto Protection or Guaranteed Asset Protection, depending upon who you ask.