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What Is Gap Insurance?

Imagine your new car is totaled in an accident. You call your insurance provider and find out that you owe more on your loan than the car is worth. Impossible, right? Not exactly. Vehicle depreciation starts as soon as you drive it off the lot. If you’re planning on purchasing or leasing a new vehicle, you may want to consider gap insurance. 

How gap insurance works

Guaranteed Asset Protection (GAP) Insurance or a gap waiver is an optional supplemental coverage that will help pay the difference between your car’s actual cash value (ACV) and what you owe on your loan or lease balance in the event your car is totaled in a covered loss. In other words, gap coverage can save you money if your new car is totaled whether or not you’re at fault for the accident.

Understanding gap insurance coverage

Gap insurance is an add-on to comprehensive and collision coverage. If your car is stolen or totaled, comprehensive and collision will pay the car’s ACV, not what you owe on the loan or lease. You may be wondering: What does gap insurance cover?

Let’s say your car is three years old and you owe $30,000 on your loan. Unfortunately, you’ve been in an accident and your car is totaled. Your auto insurance company informs you that it will pay $20,000, which is how much the car is worth, or its actual cash value (ACV). That means you’re on the hook for the $10,000 you still owe on the loan. Gap insurance will cover the $10,000 difference, subject to your deductible and coverage limits.

If gap insurance isn’t offered by your insurance provider or if the coverage isn’t quite right for you, there are other options.

  • New vehicle replacement insurance is an add-on to comprehensive and collision insurance that will cover the cost of a new car of the same make and model if your car is totaled in a covered loss.

New vehicle replacement coverage kicks in if your new car has been totaled. Your carrier will pay the value of a brand-new car of the same make and model, less your deductible.

  • Better car replacement coverage is an add-on to comprehensive and collision insurance that will cover the cost of a new car one model year newer with fewer miles in the event your car is totaled in a covered loss.

If you own a 2020 model car with 50,000 miles on it that’s been totaled in an accident, better car replacement coverage will cover the cost of a car of the same make and model that is usually one model year newer with fewer miles. For example, your 2020 model could be replaced with a 2021 model with 30,000 miles on it.

Do you need gap insurance?

Gap coverage may be essential if you find yourself in the following situations when purchasing or leasing a new car:

  • Many lessors require gap coverage for leased vehicles.
  • If you plan on longer financing terms, you may want coverage. In the later months of your loan, there’s a good chance you may be underwater on your auto loan.
  • Planning on putting less than 20% down on your new car? If so, you may end up in a finance gap where you owe more on your car than it’s worth.
  • Keep vehicle depreciation in mind. Some cars depreciate quicker than others. You may want this insurance if you’ve chosen a car that depreciates quickly.

You don’t need gap coverage if you outright own your car or if you owe less than what the car is worth. For example, if your car is worth $20,000 and you owe $10,000 on your loan, there is no “gap” for gap insurance to cover.

The cost of gap insurance and where to buy it

Gap insurance can be purchased at the dealership, lender or your insurance carrier. This add-on insurance is meant to supplement your existing coverage, not replace it. Comprehensive or collision coverage is required in order to add on gap insurance.

There are a few ways to purchase gap insurance:

  • Shortly after purchasing your new vehicle, contact your insurance carrier and add gap coverage to your existing auto policy. The coverage will last for the duration of your policy. This option may be the most cost effective. Gap insurance can be added to your existing policy for about $40-$60 per policy period, depending on your carrier. However, your insurance carrier may only offer this coverage for new cars.
  • If you opt for loan or lease gap coverage through your dealership or lender, you could pay a flat fee between $500 and $700. If gap insurance is rolled into your loan, you may end up paying interest on the insurance, which can increase the cost of the coverage.
  • Gap coverage can be purchased through a third party outside of your dealership, lender or insurance carrier. Online companies like EasyCare and AutoPay offer standalone gap insurance for new and used cars. Coverage through an online company tends to be more expensive and comes with its own set of conditions and restrictions.

Gap insurance can be canceled if you no longer need it. Maybe you’ve paid off your loan, you sold your car, changed insurance providers, or maybe you just don’t want it anymore. In most cases, if you cancel this insurance, you’re entitled to a refund. Contact the dealership or insurance carrier you purchased the insurance from to request a refund of the unused portion of the policy. You may not be eligible for a refund if you haven’t paid your gap policy premium, your coverage has expired, or you’ve missed the deadline set by your carrier to claim a refund.

Each coverage has different requirements and conditions set by the carrier, and everyone has unique insurance needs. Any changes to your auto policy should be considered carefully, especially when adding to premium costs. Adding gap coverage when you purchase or lease a new vehicle can protect you financially in the future.

We know that everyone’s insurance needs are unique. If you’d like to learn more about if gap insurance is right for you, an Amica representative would be happy to discuss your options with you. 

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