What Is Gap Insurance and How Does It Work?

Name: Answers | Gap Insurance
Uploaded: 2021-09-27
Duration: 1 min 44 s
Description: Gap insurance coverage bridges the gap between what you owe on your car loan and what your car is actually worth.

How does gap insurance work?

Gap insurance protects you from depreciation. Once you buy your car, its value starts to decrease—sometimes significantly. If you finance or lease a vehicle, this depreciation leaves a gap between what you owe and the car's value. Let's look at an example with gap insurance and without:

Car with a gap insurance payout versus a payout without gap insurance. — Amount you get without gap insurance

$20,000

Amount you get with gap insurance

$25,000

Example:

You finance $30,000 for a new car. You've had it for a few years and have been making all your payments. It's now worth $20,000 but you owe $25,000 on your loan, representing a $5,000 gap. If the vehicle is totaled, your insurer would pay you $25,000 (minus your deductible). Without gap insurance, you'd only receive $20,000 (minus your deductible).

Keep in mind, to qualify for gap insurance, you must have comprehensive and collision coverage on your policy. Watch our quick guide to learn more details about gap insurance:

Show video transcript

How does gap insurance coverage work?

Gap insurance coverage bridges the gap between what you owe on your car loan and what your car is actually worth.

On Screen Text:

How does gap insurance coverage work?

Voice Over:

Gap insurance coverage bridges the gap between what you owe on your car loan and what your car is actually worth.

On Screen Text:

Total loss of vehicle. Stolen vehicle not recovered.

Voice Over:

If your vehicle is declared a total loss or it's stolen and not recovered, gap coverage works this way.

On Screen Text:

Amount covered by comprehensive and collision. Balance covered by gap insurance.

Voice Over:

It may cover the difference between the amount paid out by your comprehensive or collision coverage and the balance left over on your vehicle loan or lease.

On Screen Text:

Remaining loan: $25,000

Vehicle's value: $20,000

No gap insurance: $20,000

With gap insurance: $25,000 *minus deductible

Voice Over:

For example, if you owe twenty-five thousand dollars on your loan and your car is only worth twenty thousand, without gap insurance you'd receive a twenty thousand dollar payout. But with gap insurance you'd receive the extra five thousand needed to pay off your loan.

On Screen Text:

When to consider gap insurance.

Voice Over:

So is gap insurance worth it? Gap insurance might be a good option to consider in these cases.

On Screen Text:

Significant difference between value and amount owed. Leasing your car. Smaller down payment on a new car. Longer financing term.

Voice Over:

If there's a significant difference between your car's actual value and what you still owe on it. If you're leasing your car. If you made a smaller down payment on a new car or if you have a longer financing term. And even though gap insurance is optional some lenders and leasing companies may require you to purchase it.

On Screen Text:

Loan/lease payoff. 25%. *Exact limits vary by state.

Voice Over:

Progressive offers loan or lease payoff coverage which is like gap insurance. The main difference is that the loan or lease payoff coverage is limited to no more than 25 percent of your vehicle's value.

On Screen Text:

Loan/lease payoff + Comprehensive + Collision.

Voice Over:

Before you can add loan or lease payoff coverage, your policy must include both comprehensive and collision coverage. Once your car is paid off make sure you drop your loan or lease payoff coverage.

On Screen Text:

Let's discuss if loan/lease payoff coverage is right for you! We offer insurance by phone, online, and through independent agents. Prices vary based on how you buy.

Voice Over:

Contact Progressive today to see if loan or lease payoff coverage is right for you.

Pro tip:

Progressive offers loan/lease payoff coverage, which is similar to gap coverage. The main difference is that the payout for loan/lease payoff coverage is limited to no more than 25% of your vehicle's value, though the exact limit varies by state.

What does gap insurance cover?

Gap insurance applies any time your vehicle is stolen or totaled in an accident. When you file a qualifying claim, your comprehensive or collision coverage will pay the actual cash value (ACV) of your vehicle, minus your deductible. Your gap coverage may then pay the difference between your vehicle's ACV and the outstanding balance of your loan or lease. If your gap coverage includes a limit, it may only cover a portion of your outstanding balance if you owe a lot more on the vehicle than it's worth. Note that gap coverage may not cover additional charges related to your loan, such as finance or excess mileage charges.

Keep in mind that gap insurance doesn't cover other property or injuries as the result of an accident, nor does it cover engine failure or other repairs.

Do I need gap insurance?

Gap insurance isn't required by any insurer or state, but some leasing companies may require you to purchase it. Also, when purchasing a new car, some dealerships may automatically add gap insurance to your loan; however, you can decline this coverage. Check your current policy to find out if you have gap insurance.

Is gap insurance worth it?

When there's a significant difference between your car's value and what you owe on it, gap insurance is a valuable safeguard. Consider buying gap coverage in these instances:

You're leasing your car: Lenders may require gap coverage on leased vehicles.
You made a lower down payment on a new car: If your down payment is less than 20%, you could end up with negative equity on the vehicle as soon as you drive away from the dealership.
You have a longer financing term for your vehicle: The longer your vehicle is financed, the better the chance of owing more on the vehicle than it’s worth.
You want to protect yourself against depreciation: Some cars have a higher depreciation rate than others, so knowing the average depreciation for your vehicle could help determine if you need gap coverage.
You have a loan rollover: If you owe more on the loan than your car is worth at the time of renewal, gap insurance can help protect you against the negative equity.

How much is gap insurance?

The cost for gap coverage varies by insurer. You can get an exact price for loan/lease payoff coverage, which is similar to gap coverage, from Progressive. Simply get a car insurance quote online and we'll give you an answer in minutes.

How long does gap insurance last?

Once you add gap insurance, it applies for the duration of your policy. However, you won't need gap coverage for the entire length of the loan. Once you owe less than what the car is worth, you can drop the insurance.

How to purchase gap insurance

While some dealers offer gap insurance for both leased and financed cars, you may end up paying interest on your gap coverage due to the bundled lease/loan payment. Buying gap insurance through your auto insurer can be a smarter option.