What Is Gap Insurance and How Does It Work?

Understanding gap insurance can help you out if you find yourself in an accident.
Christine Lacagnina Written by Christine Lacagnina
Christine Lacagnina
Written by Christine Lacagnina

Christine Lacagnina has written thousands of insurance-based articles for TrustedChoice.com by authoring consumable, understandable content.

Reviewer: Jeffrey Green Reviewed by Jeffrey Green
Reviewer: Jeffrey Green
Reviewed by Jeffrey Green

Jeff Green has held a variety of sales and management roles at life insurance companies, Wall street firms, and distribution organizations over his 40-year career.  He was previously Finra 7,24,66 registered and held life insurance licenses in multiple states. He is a graduate of Stony Brook University.

Hit and run involving car on a city street. What is Gap Insurance?

Is gap insurance required? No, it's an optional coverage that many drivers still choose to add to their car insurance policy. So then, what is the purpose of gap insurance? It's to provide a coverage cushion in case your car gets stolen or totaled and you still owe more on your auto loan than the current value of the vehicle. If you still have a lot to pay off on your car loan or lease, you might consider getting gap insurance.

An independent insurance agent can help you get set up with the right gap insurance. They'll make sure you get enough coverage in case of a disaster. But for now, let's take a closer look at gap insurance and how it works.

What Is Gap Insurance?

Gap insurance is also sometimes called "loan/lease insurance" by customers and insurance companies alike. Those who are leasing their vehicle have signed a contract with a dealership that basically allows them to rent the car for a specified period of time, and with other restrictions, such as mileage. So, what is gap insurance for cars? It gives drivers financial assistance in paying off the "gap" between the vehicle's actual cash value (ACV) and the amount they still owe on their loan or lease. The ACV of your vehicle is how much it's worth now, which factors in depreciation over time. You might need gap insurance if you know you still owe a lot more money toward your car loan or lease than your vehicle is worth.

How Does Gap Insurance Work?

If you still owe money toward an auto lease or loan and the vehicle gets stolen or totaled before you've paid it off, you can use gap insurance to cover the difference if the car's ACV is lower than the amount you owe. Any payout from gap insurance is sent directly to the lender to make up what you owe them on your lease or loan. 

Gap Insurance Example for a Vehicle That Gets Stolen or Totaled

Price of the vehicle when new $75,000
Amount still owed on vehicle loan $45,000
ACV of the vehicle at time of accident/theft $33,000
Car insurance payout without gap insurance $33,000
"Gap" owed on loan $12,000
Gap insurance payout to lender $12,000

As you can see in the example above, a driver bought a new $75,000 vehicle and got into an accident or had the vehicle stolen when they still owed $45,000 toward the auto loan. But the vehicle's ACV at the time of the incident was only $33,000, which would leave a "gap," or deficit, of $12,000. They could use gap insurance to cover this difference and the payout would be sent directly to the lender.

Drivers might also want to consider adding replacement coverage to their auto insurance if they want to be able to replace a brand-new vehicle. This coverage is only available for new cars. After an accident where a new vehicle is totaled, having replacement coverage can help pay to purchase a new vehicle of the same make and model. Without this coverage, the driver might have to pay for a new vehicle out of their own pocket.

What Does Gap Insurance Cover?

Gap insurance only covers incidents that happen to the vehicle you've loaned or leased, not bodily injuries to other drivers or their passengers or personal property damage you've caused others with that vehicle. Gap insurance will cover the gap in the amount you owe toward a loan or lease after specific incidents affect the vehicle. But you can't use gap insurance to pay another driver or third party for injury or damage you cause them or to pay for your own injuries or injuries to your passengers. Gap insurance payouts always go to the lender.

Does Gap Insurance Cover Negative Equity?

Yes, gap insurance covers the difference between what you still owe toward a loan or lease and the vehicle's ACV. This is also referred to as negative equity. 

Does Gap Insurance Cover Theft?

Yes, gap insurance can be used to pay off the difference in an auto loan or lease if the vehicle gets stolen.

Does Gap Insurance Cover a Totaled Vehicle?

Yes, gap insurance can be used to pay off the difference in an auto loan or lease if the vehicle gets totaled.

Does Gap Insurance Cover Your Deductible?

No, you're still responsible for paying your deductible amount if you have to file a claim to use your auto insurance, including gap insurance. If you had a $250 deductible and got a $9,000 payout from gap insurance, the actual amount of reimbursement you'd get would be $8,750.

Does Gap Insurance Cover Engine Failure?

No, gap insurance doesn't cover mechanical issues with the vehicle, including engine failure. 

Does Gap Insurance Cover Death or Injury?

No, gap insurance doesn't cover bodily injuries or death to the lessee of the vehicle or third parties involved in an accident. 

How Much Does Gap Insurance Cost?

The cost of gap insurance varies by a couple of different factors, including the value of the vehicle and the insurance company you get your coverage through. An independent insurance agent can help you get an exact quote for gap insurance from a local carrier based on your coverage needs. If you're wondering where to get gap insurance, an independent insurance agent can also help recommend top-rated carriers near you. 


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Is Gap Insurance Worth it?

To decide if gap insurance is worth it for you, calculate the amount you still owe on your auto loan or lease against your vehicle's ACV. If there's a big difference in these amounts, you might want to consider adding gap insurance sooner rather than later. Get a professional estimate of your car's depreciation if you're unsure.

Gap Insurance Might Be Worth It for You If:

  • You initially made less than a 20% down payment on the vehicle
  • Your auto loan has a term of 60 months or more
  • You're leasing the vehicle and the lender requires you to have gap insurance in the contract

If you have a vehicle lease, check the terms of the contract, because sometimes gap insurance is automatically included in your coverage. If it's not included but is a requirement, you'll need to add the coverage to your auto insurance policy before signing. 

Where Can You Get Gap Insurance?

An independent insurance agent is your greatest ally in getting you set up with all the gap insurance you may need. These agents shop and compare quotes for you from several different gap insurance companies. Ultimately, they'll provide you with only the results that offer the best blend of coverage and cost. And down the road, they'll be there to help file claims and answer questions for you.

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