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  2. What is Gap Insurance and Should You Buy It?

What is Gap Insurance and Should You Buy It?

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Jeffrey Johnson graduated summa cum laude from the University of Baltimore School of Law and has worked in legal offices and nonprofits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman University and worked in film, education, and publishing. His professional writing has appeared on sites like The Manifest and Vice, and he is the author of a novel ...

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UPDATED: Apr 16, 2021

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Illustration of gap insurance

Gap insurance, otherwise known as Guaranteed Auto Protection insurance, is protection from major insurance companies for when the actual cash value of your car auto loan balance is less than what you owe. This situation may arise when buying a new or nearly new car, financing a used car without a down payment, or purchasing an vehicle of considerable value.

How Does Gap Insurance Work?

Let’s say you purchase a new vehicle and finance $38,000 on your lease agreements with very little down payment. As soon as you drive off the lot, your vehicle is no longer new and the value drops considerably. If you were in an accident or your car was stolen, your auto insurers may only offer you $32,000 to replace the vehicle because of the depreciation rate.

Since you still owe the bank $38,000, there is a “gap” in loan payments of $6,000 between what your car is worth and what you still owe. That’s where gap policies kick in and pay the difference so that you can get a similar replacement vehicle. You do need to insure your vehicle with a standard auto insurance policy that provides both a comprehensive and collision insurance policy in order to qualify for gap coverage, though most major insurance carriers are gap insurance providers.

When is Gap Insurance a Good Idea?

Everyone has a different tolerance to risk, and gap insurance is completely optional. Here are a few circumstances where purchasing gap coverage may be in your best interest.

  • You do not have sufficient financial resources to cover the difference between what you owe and what your vehicle is worth
  • You are purchasing or leasing a vehicle with little or no down payment
  • Your current auto insurance company does not offer ‘new car replacement’ coverage

If any of these situations apply to you, then you may want to consider purchasing gap insurance with your next vehicle. You should also consider getting gap insurance if you live in an area where bad collisions are common, such as in the states with the worst rural roads.

But keep reading, as there is a right way and a wrong way to buy it.

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How should you buy gap insurance?

If you are buying a car through a dealership, there is a good chance that they will attempt to sell you gap insurance as part of your vehicle financing. It’s always tempting to just roll the price of gap coverage into your monthly payment and not have to pay upfront, but you will end up paying much more than you need to for coverage.

Car dealerships are paid a hefty commission for selling any kind of additional insurance or warranties, and you are better off buying coverage from your insurance agent. You may also be able to buy gap insurance through your lender, but again, it will be much higher priced than if you buy it from your local insurance agency.

Before purchasing a vehicle, talk to your insurance agent about gap coverage. There is a good chance you can obtain coverage through your current car insurance company for as little as $20 or $30 a year.

Which Insurance Companies Sell Gap Insurance?

Gap insurance is offered by many major car insurance companies, and here is a list of companies that are verified to offer it.

  • Nationwide
  • Esurance
  • Progressive – called ‘Loan/Lease Payoff’ coverage
  • American Family
  • State Farm – called ‘Payoff Protector’ and vehicle must be financed through State Farm Bank
  • Allstate
  • Travelers – vehicle must be purchased from a dealership, not a private party
  • Auto-Owners – vehicle must be purchased new
  • Erie Insurance
  • MetLife
  • Safeco
  • 21st Century in select states

With the companies listed above, gap insurance is offered as an add-on to an existing policy. So you cannot just purchase stand-alone gap insurance from them. Each one has different conditions attached to purchasing the coverage, so it’s a good idea to find out exactly what is and is not covered before purchasing.

There are some companies that offer stand-alone gap insurance policies, but the prices are much higher than if you purchase coverage from your existing auto insurance company. But if your current company does not offer it, then they may be your only option. It’s worth a Google to compare prices and see if it makes sense for you.

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