What Is Gap Insurance?
Guaranteed asset protection, or “gap insurance” for short, is an auto insurance coverage that pays the balance on your car loan when it’s totaled or stolen. It shields you from needing to make loan payments on a car you no longer have. You may also hear it called a “gap waiver,” “loan assistance coverage,” “lease assistance coverage,” or other names. You may wonder why gap insurance is necessary if you have comprehensive and collision insurance, because these help pay to replace your car. Under these two insurance types, insurers typically pay out your car’s actual cash value (ACV or fair market value) at the time of the incident, up to your policy’s limits. ACV accounts for depreciation, or loss of value from factors like your car’s age and mileage. As a result, the payment you receive from your insurer may be less than what you owe on your auto loan. Without gap insurance, you’d have to pay this difference to your lender out of pocket.
How Does Gap Insurance Work?
Cars lose as much as 60% of their purchase-price value in the first five years, and depreciation goes on every year after. Say you got into a car accident and your car was declared a total loss. You owe $15,000 on your loan at the time of the incident, but the insurance company decides your car’s fair market value is $5,000. Because your deductible is $1,000, the insurer sends $4,000 ($5,000 - $1,000) to your lender. That leaves you with a remaining balance of $11,000 to pay off. If you didn’t have gap insurance at the time of the accident, you’d have to pay off the rest of the loan. If you did have gap coverage, the insurer would first pay a settlement check for the ACV of the car minus your deductible, or $4,000 as mentioned before. Then it would total the gap coverage amount needed to pay off your auto loan balance before sending the final check to your lender. In our scenario, that’s $10,000. The insurer only covers a total of $14,000, because you’re responsible for your $1,000 deductible.
What Gap Insurance Does and Doesn’t Cover
Gap insurance covers the negative equity on your car. That means the difference between your auto loan balance and your car’s actual cash value. Like other types of insurance coverage, gap insurance has maximum benefit limits. Be sure to check these values when shopping around, to make fair comparisons. Gap coverage only extends to your car—not to other people or property—and only goes into effect when your vehicle is considered a total loss. That typically happens after a crash or if your car is stolen and not recovered. Because of these limits, gap insurance doesn’t cover:
Items rolled into your loan, such as extended warranties, loan rollover balances, credit life insurance, and late penalties and feesBodily injuries, medical expenses, funeral costs, lost wages, and other accident-related expensesFalling behind on payments due to financial hardshipVehicle repairsCar rentals while you don’t have a carA down payment on a new car
What Companies Sell Gap Insurance?
Lenders may require you to buy gap insurance when you finance a car. If you lease one, it may be rolled into your cost. You can know for sure by checking your coverage paperwork. You can purchase gap insurance from dealerships, financial institutions such as banks and credit unions, auto insurers, and other third parties. How long you have to buy this coverage varies. For example, you may have 30 days after buying a new car to get gap insurance with an auto insurer, while some third parties allow you to purchase it at any time—as long as it’s before a loss occurs. Your coverage may last for as long as you have your policy. Some companies offering gap insurance are:
AAAAllstateAmerican Family InsuranceEsuranceGap DirectNationwidePenFed Credit UnionProgressiveState Farm (Payoff Protector included with State Farm Bank loans)The Hartford
How Much Does Gap Insurance Cost?
Gap insurance typically costs 5% to 7% of your comprehensive and collision insurance premium when buying from an auto insurer—about $5 per month on average. Your insurer may take into account your car’s ACV and your age, state of residence, and previous car insurance claims to set your gap insurance premium. Gap insurance is generally a flat $400 to $600 at car dealerships when financing, but may be included in lease contracts. You can ask your car dealer how much gap insurance costs. At credit unions, you may find gap insurance for less than $200. Insurance companies often require you have comprehensive or collision coverage before you can add gap coverage. Other third-party sellers may not care. In any case, your lease contract or lender likely requires you to carry comprehensive and collision insurance.
How to File a Gap Claim
How you file a gap claim varies by company and where you purchased the coverage. With car insurance companies, you’d file a claim like you would with any type of car incident. You usually can do so online, through the insurer’s app, or by calling a representative. If your gap insurance is from another party, you likely have to go through their claims process after contacting your insurer. They may ask you to call them directly or to contact the gap insurance company instead. You may also be asked to fill out and submit a form. Companies may ask for a police report as well as documents from your dealership, financing company, and insurance company, such as a copy of your settlement check.
