Gap insurance is a type of auto insurance coverage that covers the difference between what you owe on your car and its actual cash value if it is damaged or totaled. It is optional coverage, and you should consider buying it if you have leased or financed your vehicle.

Key Highlights
  • If you have an accident while you’re still upside down on your loan or lease, gap insurance will pay the difference between what you owe on your car and its worth.
  • Gap insurance does not pay if the claim for the totaled or stolen car is denied for some reason, or your car insurance coverage has lapsed.
  • Gap insurance is optional and not required by any state as part of your car insurance policy.

What is gap insurance?

If your insurer totals your vehicle by a covered peril, such as an accident, theft, fire, flood, tornado, vandalism, or hurricane, the insurer will pay you the actual cash value for your car, if you have comprehensive and collision coverage. This amount is often considerably less than what you still owe on your loan or due for a lease payoff.

When your actual cash value (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 where gap insurance may save the day.

What does gap insurance cover?

If your car is stolen or totaled, gap insurance will pay the difference between the ACV of the vehicle and the current outstanding balance on your loan or lease. Sometimes it will also pay your regular insurance deductible.

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 (or loan/lease payoff insurance) as optional coverage.

You must also have comprehensive and collision coverage to buy gap coverage, but if you lease or finance your car, those are typically required.

What isn’t covered by gap auto insurance?

Gap insurance won’t pay for the following:

  • 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

Does gap insurance cover theft?

Yes, gap insurance covers your car if it’s stolen and not recovered. It works with your comprehensive insurance to cover theft. Comprehensive will pay out up to the actual cash value of your car, minus your deductible if your car is stolen. This coverage would then pay the difference between that amount and what you owe on your loan.

How does gap insurance work?

Let’s look at an example of how gap coverage protects you when you owe money on your car and it’s stolen or totaled.

  • You buy a car that costs $25,000 and 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 comprehensive and collision coverage with $500 deductibles.
  • You have an accident while you’re still upside down on your loan or lease (meaning you owe more on a car than it’s worth), and your vehicle is totaled.
  • The insurance company determines that the car’s actual cash value 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

What is loan or lease coverage, and how does it differ from gap coverage?

While the terms gap insurance and loan/lease coverage are often used interchangeably, they aren’t quite the same. Gap insurance will pay the difference between the amount you still owe on a vehicle and the actual cash value (ACV) paid out by your car insurance company.

Lease/loan coverage typically has limitations on how much it will pay out, such as 25% over the determined ACV of your vehicle. Both are minus your deductible.

Run the numbers to ensure lease/loan coverage would work for you. For instance, if your vehicle were worth $20,000, then 25% of its value would be $5,000, which is the same as the gap ($25,000 due – $20,000 paid by the insurer and your deductible = $5,000) so it would have covered the whole amount.

Tip iconExample

Let’s say you have loan/lease coverage that pays 25% more than the actual cash value of your car, and you buy a car for $40,000. Then the car depreciates to $25,000 over time. The most you’d get reimbursed would be $31,250 minus the deductible after it’s declared a total loss.

Do I need gap insurance?

Many car owners don’t consider the depreciation of a new car. Within minutes of driving off the lot, a new car can be worth 10% less than you paid.

And depreciation continues over the life of your car, especially in the first five years you own it. According to CarFax reporting on current depreciation rates, the value of a new vehicle can drop by more than 20% after the first 12 months of ownership. Then, for the next four years, you can expect your car to lose roughly 10% of its value annually.

This means a new car can be worth as little as 40% of its original purchase price after five years. That means the payout for the car’s value will likely be much less than what you owe for at least the first several years.

If I bought my car outright, do I need gap insurance?

There’s no reason to buy this coverage if you bought a car with cash and own it without a loan. It 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 more than the car is worth, so there would be no payout from gap coverage.

If I paid a high down payment, do I need gap insurance?

If you put down a decent down payment, your vehicle doesn’t depreciate at a steady pace and you’re paying down the balance of the loan each month, you typically wouldn’t need gap insurance coverage.

Gap car 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 is a total loss by an insurer.

Is gap insurance required?

While you need gap insurance if you owe more on a vehicle than its value, gap coverage isn’t required by any state as part of your car insurance policy.

Gap insurance coverage is optional coverage; however, it’s not uncommon for lease contracts to have gap insurance included in them. Sometimes it’s called auto loan/lease coverage or loan/lease payoff coverage.

If a leased car lender requires gap insurance, they must include it within the lease’s cost. This means that the monthly price quoted by the dealer must include gap coverage when they mandate you carry it.

Some financial institutions may want you to have gap coverage as part of your auto insurance policy on the car you’re purchasing. Your loan or lease papers should note this if this is the case.

If you have declined gap insurance, a dealer shouldn’t be able to add it to your loan amount or charge you for it in another way. Even though it may be helpful if you owe more on the vehicle than 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.

Is gap insurance worth it?

The answer to this question depends on your situation. Gap insurance may be worth it if you owe much more than the car’s worth.

So, for instance, if you bought an $80,000 car and only put down $5,000, you may want to get gap insurance so you’re not stuck having to make up the difference if an insurer totals your car.

If the outstanding loan or lease balance is only slightly more than the vehicle’s, you may want to change it. In that case, it’s a good idea to put some money aside in case you need it if an insurer totals your car.

In addition to depreciation, you may want gap insurance for these reasons:

  • You owe more on your loan than what your car is worth
  • You made a low down payment on your car, under 20%
  • You don’t have enough savings to pay the gap between your loan and your car’s value
  • You drive more than 15,000 miles a year, as this accelerates your car’s depreciation
  • The model car you have depreciates at a faster rate than the typical average

Does gap insurance always pay out?

It pays out as long as the total loss claim isn’t denied and you have car insurance coverage in effect. However, that amount will be deducted if you miss car payments. For instance, if you are late on a car payment of $400, that amount will be deducted from your gap insurance payout.

When doesn’t gap insurance pay out?

There are instances when gap coverage won’t pay out. For example, if the claim for the totaled or stolen car is denied for some reason, or if your car insurance coverage lapsed, your gap insurance won’t come into play. And, because it’s limited to claims that declare your car a total loss, it wouldn’t cover the following, which is covered under other types of car insurance:

  • Injuries: Gap insurance does not cover medical bills.
  • Property damage you cause: Damage to a third party’s property isn’t covered by gap insurance.
  • Damage to your car that isn’t your fault doesn’t result in a total loss: Even if your car sustains severe damage, gap insurance will only cover it if it is considered a total loss and you can no longer drive it. The other driver’s property damage liability would pay for damage to your car. Or, collision insurance would cover it, regardless of fault. In both cases, gap insurance would not cover the claim because the car wouldn’t be declared totaled.

Will gap insurance pay your deductible?

The answer depends upon your gap insurance policy. Some policies pay the deductible and some don’t. When it pays the primary insurance deductible amount, the deductible amount isn’t actually reimbursed back to you. Instead, 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.

How do you get gap insurance for cars?

You can buy gap insurance for cars from the following:

  • The bank or financial institution that loaned you the money to buy the car
  • The dealership where you bought the car
  • Your car insurance company
  • From a company that specializes in stand-alone gap insurance policies

Can I get gap insurance without primary insurance?

You need to have a standard auto insurance policy to get this coverage. For your gap insurance to be in effect, you must carry physical damage coverages of collision and comprehensive on your vehicle in addition to your state’s required minimum liability insurance requirements. The bank or lending institution where you got your car loan usually requires this “full coverage” of liability and physical damage coverage.

Even if you get a stand-alone gap policy, you still need your state’s minimum auto insurance coverage.

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. It’s beneficial when the value of a vehicle, whether new or used, depreciates while you still owe money on the loan or lease.

Is gap insurance acceptable as proof of insurance?

No. A gap policy isn’t accepted by the Department of Motor Vehicles as proof of insurance. It’s not the right type of insurance needed to show financial responsibility when you register or renew your vehicle’s registration.

Showing proof of gap coverage to law enforcement won’t help if they ask you for proof of insurance. It 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.

Can I get gap insurance on a loan that is not for a car?

You cannot get gap coverage for lines of credit that may be used for purposes other than a vehicle. It doesn’t work with mortgage loans, credit lines, balloon payments or other types of non-vehicle-specific loans.

If you have used your Home Equity Line of Credit (HELOC) money to purchase your vehicle, gap insurance will not cover this type of loan since the HELOC is not specifically used for a vehicle loan.

Gap coverage 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 if my loan is from an individual?

Gap policy providers won’t offer coverage if your loan is through a private individual.

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.

Can you buy gap insurance anytime?

Gap insurance providers’ terms and guidelines differ; gap insurance is generally available on new, used and refinanced cars, trucks and SUVs 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 ACV gap coverage could benefit you.

Can you get gap insurance after an accident?

No. You cannot get gap insurance after an accident that totaled your car. This means you’ll have to pay off your car loan by yourself. 

— Michelle Megna contributed to this story.

Gap insurance providers: Where to buy gap insurance?

FAQs: Gap insurance

Am I due a refund if I pay the car off? How do I get a refund?

If you financed your vehicle and the gap insurance is part of your vehicle’s financed monthly payment, 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 — the coverage is used that same month.

If you paid for your gap insurance policy in full, you must contact the company that sold you the policy to see if any unused premium should be refunded when you trade in or pay off your car.

How can I cancel my gap insurance?

You can cancel gap coverage if you determine that you no longer need it.

Gap policies, terms and fees vary. To find out about how to cancel your existing gap policy, you’ll need to read through the contract. If you still have questions, contact the insurer directly.

If you recently purchased the policy, depending upon your gap insurance company, you can receive a full refund if you cancel within a specific time period (typically 30 days). A cancellation fee may apply. After that initial period, you usually will receive a prorated refund if you cancel the policy.

Check out our detailed guide on how to cancel your gap insurance

What is stand-alone gap insurance?

Stand-alone gap insurance is separate and independent of your existing car insurance policy. Typically, gap insurance is added to your standard coverage.

However, some companies sell stand-alone gap policies, though there are very few. If you buy a stand-alone policy, be sure to check the details, as it may be more expensive than buying it from your existing company, and may have limitations on what it pays out.

Does a late car payment void a gap policy?

No. Being late with your car payment won’t void your gap policy.

However, your gap insurance won’t pay out for the late payments if you total your vehicle and are behind on payments. Gap coverage 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 specific items, such as late car payments.

Will gap insurance pay if the claim is denied?

No, it won’t 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.

Is gap insurance transferable?

Gap coverage can’t be transferred to a different vehicle or loan. If you’re trading in, selling, or buying a new vehicle, you’ll need a new policy to cover the newly financed vehicle.

Does gap insurance come with a deductible?

No, it doesn’t normally have a deductible.

What is a gap insurance 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.

When did gap insurance start?

This coverage type began in the early 1980s to help those insured who purchased a car and found themselves owning more than it 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.

How long does gap insurance last?

It will continue for the duration of your gap policy. You don’t need this coverage once you’ve paid off your car loan, or even once you owe less than the actual cash value of your car. You should notify your insurer that you want to cancel the coverage at that time. Otherwise, it will remain in force until the end of the gap policy terms.

Laura Longero

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Laura Longero

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Laura is an award-winning editor with experience in content and communications covering auto insurance and personal finance. She has written for several media outlets, including the USA Today Network. She most recently worked in the public sector for the Nevada Department of Transportation.

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Kathryn has been working as a journalist and freelance writer for over 15 years. She specializes in personal finance, insurance, consumer debt and banking, and all types of loans. She has written for dozens of major publications, small businesses and personal finance companies.