Gap insurance explained

Gap insurance pays the difference between what your insurer pays for a totaled or stolen car, its actual cash value, and the larger amount you still owe on the loan or lease. Without it, you could lose the car and still owe the lender thousands of dollars. You need it only while you are "upside down" on the loan, which is most common in the first few years after buying with a small down payment or a long loan term.

Why the gap exists

When a car is a total loss, collision or comprehensive coverage pays its actual cash value (ACV): what the car was worth just before the loss, reflecting age, mileage and condition. Loan balances fall slowly, especially in the early years of a long loan, while cars lose value quickly. For a stretch, the balance can be higher than the value.

Things that make a gap more likely:

• A down payment of little or nothing
• A loan term of six years or longer
• Rolling negative equity from a previous car into the new loan
• Financing taxes, fees, warranties and add-ons
• A model that loses value quickly
• High annual mileage

How a gap claim works

Travelers gives a simple illustration: if your car is worth $10,000 when it is totaled but you still owe $15,000 on the loan or lease, loan or lease gap coverage pays off the remaining $5,000 (Travelers).

The order of events:

1. Your car is totaled or stolen and not recovered.
2. Your collision or comprehensive coverage pays ACV minus your deductible, usually directly to the lienholder.
3. The gap coverage pays the remaining balance, up to its limits and exclusions.

Whether gap also covers your deductible depends on the product. Nationwide and Liberty Mutual both say their gap coverage does not cover the deductible (Nationwide, Liberty Mutual). If you buy from a dealer or lender, ask whether the product covers the deductible. Run your own numbers in the gap insurance calculator.

Where to buy it

You can usually get gap protection in three places:

From your auto insurer

Many insurers sell it as an add-on to a policy that already has collision and comprehensive. Terms differ:

Sources: Progressive, Nationwide, Liberty Mutual, Travelers, Allstate.

Not every insurer offers it. GEICO states that its auto insurance offerings do not include gap insurance (GEICO). State Farm sells its version through lending instead: Payoff Protector is included with vehicle loans originated by State Farm Bank and is not an insurance product (State Farm).

Note the cap on Progressive's product. Loan/lease payoff coverage that tops out at a percentage of the car's value may not cover a very large gap.

From the dealer or lender

Dealers often sell a GAP waiver or debt cancellation addendum as part of the loan. When its price is rolled into the amount financed, you pay interest on it too. Insurer-sold gap may cost less; Liberty Mutual says it may be cheaper through your car insurer than through a dealer or lender. Ask for the price as a separate line, and know that you can usually decline it.

Included with a lease

Many leases already include gap protection. Nationwide notes that lease gap coverage may already be included in the cost of a lease, so check your lease paperwork before buying more. See insuring a leased car.

What gap does not cover

Read the exclusions. Travelers, for example, lists carryover balances, lease penalties, overdue payments and extended warranties as not covered. Common exclusions across products include:

• Negative equity rolled in from a previous car
• Late fees and missed payments
• Excess mileage and wear charges on a lease
• Extended warranties, service contracts and other add-ons financed into the loan
• Your deductible, on many insurer products

Gap also does not replace your car. It clears the debt; you start over with no car and no loan. If you want a replacement vehicle, look at new car replacement coverage.

Do you need it? A checklist

Gap is worth considering if most of these are true:

1. You financed or leased the car, and the lease does not already include gap.
2. You made a small down payment, or rolled in negative equity from a previous car.
3. Your loan term is long.
4. Your loan balance is higher than the car's current market value. Compare your payoff amount with a pricing guide.
5. You could not pay the difference from savings if the car were totaled tomorrow.

You probably do not need it if you paid cash, made a large down payment, or owe less than the car is worth. See what happens if your car is totaled and you still owe money for what happens without it.

When to cancel

Gap protects you only while you owe more than the car is worth. Check every six months or so by comparing your loan payoff with the car's value. Once the balance drops below the value, you can usually remove insurer-sold gap at the next renewal. For a dealer-sold product, ask the dealer or lender about a prorated refund when you pay off, refinance or sell early; refund rules depend on the contract and state law. See insurance requirements for a financed car.

Key takeaways

• Gap covers the shortfall between a totaled car's actual cash value and your loan or lease balance.
• Insurers, dealers and lenders all sell versions with different limits and exclusions; some cap the payout or exclude your deductible.
• GEICO does not offer gap; Progressive sells loan/lease payoff capped at 25% of the car's value.
• Leases often include gap already.
• Drop it once you owe less than the car is worth.