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What Is Gap Insurance?

Gap Insurance for Cars
Table of Contents

You may have heard that a new car depreciates as soon as you drive it off the lot. Technically, the value of every purchase decreases over time. However, it’s particularly concerning in vehicles because they are such a big ticket purchase and often take years to pay off. As such, it’s not uncommon for car owners to owe more on a car loan than the car is worth. This can present a big problem if involved in an accident or if something happens to your car.

Gap insurance can protect you against financial losses when you owe more than your car is worth. Yet, many drivers know little about it. This guide can help you learn more about gap insurance and understand how to use it. Then, you can evaluate whether it’s the type of coverage you need.

What is Gap Insurance?

Gap insurance is an optional type of auto insurance designed to cover the gap between what you owe on your car and how much it’s worth. Technically called guaranteed asset protection insurance, it can help you pay off your car in the event of a total loss.

Vehicles depreciate most during their first year of ownership. As a result, it’s not uncommon for your loan balance to be more than your car is worth. If you’re in an accident or your car is stolen, typical insurance policies reimburse you what the car is worth. Without gap insurance, you’ll be left paying the remaining amount out of pocket.

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It’s important to understand that this insurance doesn’t pay you the full amount you paid for your car. It pays the remaining balance on the loan after your existing policy pays for the vehicle’s worth, minus your deductible, and only up to your coverage limit. If you have a large deductible or a low coverage limit, you may still have to foot some of the costs.

When You Might Need Gap Insurance

When you understand the purpose of gap insurance, it becomes clear that it’s not a valuable investment for every car owner. For instance, if you pay off your car, gap insurance would offer you no added value. Still, not every car owner who is paying off loan benefits from gap insurance. The Insurance Information Institute provides these guidelines to help you determine if you need this insurance for your new car or truck purchase.

  • You made less than a 20% down payment.
  • The vehicle is financed for 60 months or longer.
  • You leased the vehicle. (It may be required in this case.)
  • You purchased a vehicle that depreciates faster than average.
  • You rolled over negative equity from an old car loan into the new car loan.

How Does Gap Insurance Work?

Gap insurance is typically used in conjunction with collision or comprehensive insurance. Standard auto insurance policies only pay the current market value of a car in the event of a total loss. If a covered loss occurs, your collision or comprehensive policy will pay out the current market value of your car. If you owe more than that amount on the loan or lease, gap insurance covers the added cost up to your policy limit.

For example, if you owe $26,000 on your car loan and you’re in a bad accident that results in extensive damage to your vehicle, your collision coverage may only pay out $20,000. This leaves you owing $6,000 on a car you can no longer use. Here’s where gap insurance comes in. Your gap policy will bridge the gap between your collision coverage and what you owe on your car minus your deductible.

Is Gap Insurance Worth It?

An insurance adjuster inspecting a car for gap insurance.
Insurance adjuster inspecting the damage to a vehicle

It’s common for drivers to wonder if gap insurance is a worthy investment. While most insurance policies have a clearly established value, gap insurance is a little different. We’ve already established that not every driver will benefit from this insurance. However, car dealers often push it as a valuable add-on. Not every new car owner needs this insurance.

If you made a large down payment on your vehicle, you might not ever be in the position for gap insurance to pay out. For example, imagine you saved enough to put a down payment of 35% of the worth of your car. If your car depreciates 20% during the first year and 15% during the second year, you could surmise that you could benefit from gap insurance during the third year of car ownership. Yet, this fails to take into consideration that you’ve already been paying down your loan for two years. At that point, you’re unlikely to owe more on the car than it’s worth.

On the other hand, gap insurance could be a vital coverage type for a car owner who can only afford to pay a small down payment. It’s not uncommon for car owners to be underwater on the loan during the first few years of ownership. While this usually balances out after a few years, it can result in catastrophic financial losses during the first few years of owning a new vehicle.

Bridge in Finances

Gap insurance is only used to bridge the financial gap between your standard insurance coverage limits and the amount you owe on a car loan or lease. For this reason, it can be challenging to determine whether it’s a valuable asset. Luckily, many insurance companies offer this insurance coverage, so you don’t have to make the decision in a high-pressure situation.


If you’re buying a new car, contact your local independent insurance agent to learn more about gap insurance. When you share the details about your individual situation, your agent can help you determine whether gap insurance is a valuable investment.

If you’re thinking about buying a new car in Massachusetts or you’re underwater on your car loan, contact the independent agents at LoPriore Insurance to learn more about the benefits of gap coverage. It could be the difference between whether you pay out of pocket to take care of your car loan.

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