What Is Gap Insurance for Cars, and Do You Need It?

Gap insurance, or guaranteed asset protection, is a type of optional coverage that helps cover the cost of paying off your loan or lease if you total your car or someone steals it. Most insurers only pay out your car’s depreciated value, which isn’t always enough to cover a loan payoff. Without gap insurance, you’ll be on the hook to cover any differences out of pocket. 

You can buy gap coverage from your lender, a dealership, or through your insurance company. If you add it to your policy, you may have a small increase in your rate. For example, the national average cost of a full-coverage policy is $182 per month. Adding gap coverage typically costs an additional $20 per year.​​1 Shopping around can help you find the best rate. 

Here’s a closer look at gap insurance and how it works.

What gap insurance covers

If you total your car in an accident or someone steals it, a standard insurance policy only covers the car’s actual cash value after any deductible. Gap insurance, on the other hand, covers the difference between what your insurer pays and what you owe on the car.

But gap insurance doesn’t cover additional charges, such as excessive lease miles or finance charges on a loan. Gap insurance also doesn’t cover property, personal injuries, or any issues with the car unrelated to an accident or theft.

How long gap insurance lasts

Gap insurance lasts for the entirety of your policy. But you can cancel it once your loan balance is less than the car’s value. Most people need gap insurance for the first couple of years they own or lease a vehicle but then remove the coverage from their policy to lower their premiums.

How much gap insurance costs

The cost of gap insurance depends on where you buy coverage. You can buy a policy from your auto loan company or existing car insurance company. Although not common, you may also be able to buy stand-alone gap coverage.

Here are estimated costs from various gap insurance sources:

• Auto loan company: Purchasing gap coverage from a lender typically costs $500–$700. Sometimes, your auto lender may offer gap insurance as “loan forgiveness” coverage.

• Your current auto insurer: Gap insurance costs around $20 per year for coverage when buying a policy for a new car.

• Stand-alone policy: If your insurer doesn’t offer gap coverage, you may be able to buy a separate policy for a one-time fee. Coverage usually costs around $200–$300.

When you may need to buy gap insurance

No states legally require gap insurance, and not everyone needs to purchase it. But you may decide you want the additional coverage. Certain situations that warrant considering gap insurance include the examples below.

If you have a car loan

Lenders may require that you have gap insurance if you take out a long-term car loan of five years or longer, according to the Insurance Information Institute. When you have a longer-term loan, you pay more interest up front, which means you have a higher risk of owing more than the car’s value.

In addition, gap insurance ensures that you’ll be able to pay back your loan if you total your vehicle or someone steals it.

If you lease your car

Leasing companies typically require gap insurance to protect their investment in the car. The company leasing your vehicle often builds gap insurance into the leasing agreement or as part of the contract.

Monthly payments for a leased vehicle tend to be lower than typical auto loan payments, which increases the gap between the vehicle’s actual value and the amount you still owe. Gap insurance protects you, and the company you leased your car from, in the event of total loss. 

If you have a high-value vehicle that depreciates quickly

Luxury vehicles depreciate faster than regular vehicles, which may lead you to be upside-down on your loan almost as soon as you drive it off the lot. Unless you make a sizable down payment on the car, your lender might require gap coverage to protect the loan collateral.

If you drive a lot

If you drive more than average — more than 14,000 miles per year — your car will depreciate faster than average. This can leave you upside-down on your loan much faster and longer, making gap insurance worth it.[2]

Where to buy gap insurance

You can purchase gap insurance from almost any auto insurance company, car dealer, or lender. But purchasing gap coverage from your auto insurer is typically more cost-effective than buying it from a car dealership.

Most car insurance companies offer gap insurance, but here are five known for providing the best quality gap insurance:

Travelers

Nationwide

Progressive

Allstate

The Hartford

Gap insurance alternatives

A few alternatives to gap coverage exist and may make more sense depending on your insurance needs.

• New car replacement coverage gives you money for a brand-new car of the same make and model, minus your deductible. But only cars of a certain age or mileage qualify.

• Better car replacement coverage gives you enough money to purchase a car that’s one year newer and has at least 15,000 fewer miles than your current vehicle.

• Loan/lease payoff coverage typically pays up to 25% beyond your vehicle’s actual cash value (ACV) if someone steals your car or you total it in an accident. The vehicle must be considered a total loss.

How to save money on car insurance

The cost of gap insurance is typically minimal, so adding it to your insurance policy won’t affect your rate by much. But using strategies to save on your premiums is always a good idea. Here are a few ways to find cheap auto insurance:[3]

Gap insurance for cars FAQs