Guaranteed Asset Protection (or GAP) insurance is a type of auto coverage that individuals use to cover the gap between what they owe on their loan or lease and what the vehicle’s value is determined to be by the insurance company. This type of insurance helps free drivers of having to make payments for a car they no longer have in the event of a stolen or totaled vehicle. Understanding GAP insurance can help you determine if it’s necessary for your situation. Here we discuss GAP insurance, how it works, when you may need this type of insurance, and how to obtain this form of auto coverage.
What Is GAP Insurance?
GAP insurance is a form of car insurance that drivers may opt for if they experience a totaled or stolen car. This type of plan pays the difference between what a person owes on a car and what their car’s worth should their vehicle be stolen or totaled. Drivers who made no or a small loan down payment, lease their vehicle, or have a depreciating car often use GAP insurance.
There are several providers which offer GAP insurance, including from your car insurance company, a dealership, or a loan provider. Common companies where you can get GAP insurance include Allstate, State Farm, and Progressive.
How Does GAP Insurance Work?
GAP insurance works by providing coverage for the gap between what a person’s car is worth and what they still owe on a lease or loan. Individuals typically only use this type of insurance if the car is totaled or stolen. While regular insurance only covers the cash value of a vehicle, gap insurance covers the price you paid for the automobile.
Here’s an example: Buyer A purchases a vehicle for $60,000 and makes no down payment, and chooses not to buy GAP insurance. A year after buying the vehicle, the car is stolen, and the insurance company values it at $45,000 but the buyer still owes $52,000 on the loan. Buyer A would be responsible for the outstanding $7,000 balance after the insurance company sends the bank a check for $45,000.
Here’s another example: Buyer B purchases a vehicle for $60,000 and makes no down payment, and chooses to buy GAP insurance. A year after buying the vehicle, the car is involved in an accident and totaled, and the insurance company values it at $45,000 but the buyer still owes $52,000 on the loan. The GAP insurance policy would cover the outstanding balance of $7,000 after the insurance company sends the bank a check for $45,000, and Buyer B would not be on the hook for any remaining out-of-pocket loan expenses.
When You May Need GAP Insurance With Full Coverage
While not required by states specifically, some lenders do require car leasers or owners to have GAP insurance. The following are instances in which you may want to consider purchasing gap insurance even if your insurance company or loan provider doesn’t require it:
- Your down payment was much less than the actual cost of the car, and you have a large car loan you’re paying off
- You lease your vehicle
- Your vehicle depreciates faster than other cars
- You include other products in your car financing, such as dealer-installed options or debt you still owe on previous car purchases
- Your vehicle has high mileage, such as if you drive it over 15,000 miles each year
- You used a long-term loan to obtain your vehicle, such as one that is more than 72 months
Differences Between GAP and Full Coverage Insurance
There are a few key differences between GAP insurance and full coverage insurance. The primary difference is that GAP insurance, sometimes referred to as guaranteed asset protection insurance, covers you financially in terms of depreciation costs or the difference between what you owe and what your insurance provider prices the vehicle. Other types of insurance, such as comprehensive or liability insurance, won’t cover these costs. Additionally, individuals who still owe on their vehicle typically opt for GAP insurance, while full coverage insurance is for anyone with a car despite whether or not it’s paid off.
Another difference is that GAP insurance only covers the costs mentioned above and does not provide coverage for anything else related to your vehicle. In contrast, full coverage may cover your injuries, damages, or losses as well as your passengers’ and other drivers’ if an accident were to occur. For example, collision insurance covers your vehicle if you collide with another car or object, such as a tree or side rail.
How Much Is GAP Insurance?
How much you pay for GAP insurance may largely depend on where you purchase it. Some insurance companies will bundle your gap insurance into your full coverage plan but if you choose to go through a bank or dealership, you may pay up to $700 for this type of insurance. It’s important to keep in mind that if you roll GAP insurance into your car’s loan, you’ll essentially be paying interest on the GAP insurance, which could make it even more expensive.
How to Get GAP Insurance
You have several options when it comes to getting GAP insurance for your vehicle. One option is to go through an auto dealership. If you opt to do so, keep in mind that this is often the most expensive option. You may also obtain GAP insurance through your current auto loan lender, in which they add the cost of the gap insurance to how much you still owe on your car loan. Additionally, some auto leases include gap insurance in the premium or include a waiver called “gap liability” to your lease plan.
One of the best ways to get GAP insurance is through your current auto insurance company, as you can easily add it to your existing plan. It’s important to keep in mind that if your insurance provider doesn’t offer GAP insurance, you won’t be able to purchase it as a standalone option from other insurance companies.
Getting GAP insurance is a simple thing and is often a good idea if you still owe money on your current car. If you’re interested in learning more about GAP insurance, consider contacting your insurance company or car dealership for more information.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.