Home What is GAP Insurance and How Does It Work?

What is GAP Insurance and How Does It Work?

by Tony Arevalo
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What is Gap Insurance?

GAP insurance is an optional coverage that you can add to your policy for an extra charge. Insurance companies pay only the actual cash value of your car if it was totaled, which is its price in the used car market. If you took a loan and didn’t put much money down, you may end up still paying for a car that you no longer drive. That’s where GAP insurance jumps in. It repays the difference between the amount that’s left on your loan and the actual cash value of your totaled vehicle. Read on to see how it works in more detail and to learn which insurance companies offer affordable gap coverage.

How Does GAP Insurance Work?

When you buy a car from a lender, your loan will be equal to the price of the new car + taxes and other miscellaneous expenses. For example, let’s say that the total amount on a 5-year loan after you put some money down is $25,000.

Now, imagine your car got wrecked after two years, and the insurance company declares it a total loss. How much will be the payout? Surely not the full $25,000.

Without GAP insurance coverage, the company will only pay you the amount equivalent to the value of a used car that’s the same age, make, and model. This is known as the Actual Cash Value (ACV). And they are not going to be generous!

Based on our experience, you will likely get around $12,000 for your vehicle. So if the loan amount you’ve paid equals $10,000, there is still $3,000 left on your car loan after the insurance company reimburses you. That is what auto GAP insurance covers. A deductible may apply.

Total loan = $25,000

Amount paid = $10,000

Actual cash value of the totaled vehicle = $12,000

GAP insurance payout = $25,000 – $12,000 – $10,000 = $3,000

FUN FACT: Did you know that GAP insurance does not refer to any actual “gap”? It is an abbreviation for Guaranteed Asset Protection.

When Do You Need GAP Insurance?

Remember, if it’s for your car, GAP insurance is an optional add-on to your policy. This means it costs extra, and that you should certainly decline it when you don’t need it. But when do you really need it?

Obviously, if you didn’t get a loan for your car, you will not need GAP insurance, and this article is not for you. Better go straight to our reviews to find the best car insurance in the market and see which companies offer New Car Replacement coverage.

Additionally, if the amount on your loan is smaller than the ACV of your car, you won’t need GAP insurance coverage. That happens in these two situations:

  •         You put a significant amount of money down when you got the loan.
  •         Your loan period is nearing the end, and you’ve paid out most of your loan.

In other instances, it’s smart to purchase GAP insurance. Furthermore, sometimes it will be mandatory to get this coverage. Certain loan or lease providers will require you to buy GAP insurance, either as a part of the deal or separately.

In some situations, you may want to cancel your GAP insurance and seek a refund. This can happen if you’re refinancing your vehicle and you think that the ACV of your car has exceeded the amount left on your loan.

How to Calculate if You Need GAP Insurance

First, you will need to know how much you’ll have left on your loan every trimester. Next, you can use an online calculator to get a rough idea of how much your car model will depreciate. Once there’s no negative difference between the amount left on your loan and the value of your vehicle, you won’t need GAP insurance anymore.

An Example of How Gap Insurance Works

An Example of How Gap Insurance Works

How Much Is the Cost of GAP Insurance?

The standard GAP insurance cost is usually equal to 4%–7% of the amount you’re paying for collision and comprehensive coverage. This means that if your yearly premium is $1,200, you will spend from $48 to $84 annually. The amount may not seem like a lot, but it piles up over time.

Like with other policy add-ons, the price of GAP coverage varies significantly based on your profile and the insurance company. That’s why it’s essential to negotiate and shop around. You may end up saving a couple hundred dollars for the entire loan period.

Who Offers GAP Insurance?

There’s a significant number of US insurance companies that you can buy GAP insurance from. Check the full list below to see which companies offer this coverage. And to make sure you’re getting the best car insurance, we included our review scores in the table.

Company NameGAP InsuranceCarsurance Score
21st CenturyIn Select States Only*Pending Review
AAAYVery Good
AllstateY*Pending Review
Allied P&C InsuranceY*Pending Review
AMCO Insurance Co.Y*Pending Review
American FamilyYGood
American NationalY*Pending Review
AmeripriseY*Pending Review
Amica MutualYTop 3
Auto-OwnersYExcellent
Charter Indemnity Co.N*Pending Review
Coast National Insurance Co.N*Pending Review
DairylandY*Pending Review
Economy preferred Insurance Co.N*Pending Review
Encompass Indemnity Co.Y*Pending Review
Enumclaw P&C Insurance Co.Y*Pending Review
ErieYTop 3
EsuranceYVery Good
FarmersYGood
ForemostN*Pending Review
Garrison P&C Insurance Co.N*Pending Review
GeicoNExcellent
Grange Insurance Assn.N*Pending Review
Hallmark Insurance Co.N*Pending Review
HanoverNGood
The Hartford (AARP)YVery Good
IDS Property CasualtyN*Pending Review
InfinityY*Pending Review
Integon Preferred Insurance Co.N*Pending Review
Liberty MutualY*Pending Review
MAPFRE InsuranceY*Pending Review
MercuryN*Pending Review
MetLifeYGood
MetromileY*Pending Review
Metropolitan Casualty Insurance Co.Y*Pending Review
Mid-Century Insurance Co.In Select States Only*Pending Review
Middlesex Insurance Co.N*Pending Review
Mutual of Enumclaw Insurance Co.N*Pending Review
NationwideYGood
Omni Insurance Co.N*Pending Review
Pacific Star Insurance Co.N*Pending Review
Peak P&C Insurance CorpN*Pending Review
PemcoN*Pending Review
ProgressiveYVery Good
SafecoYVery Good
Sentinel Insurance Co. LtdY*Pending Review
SentryY*Pending Review
State FarmYVery Good
TravelersYVery Good
Trumbull Insurance Co.N*Pending Review
Twin City Fire Insurance Co.In Select States Only*Pending Review
USAAYTop 3
Unitrin Auto & Home Insurance Co.Y*Pending Review

Cheapest Companies That Offer GAP Insurance

If you’re looking for the most affordable GAP insurance companies, we’ve got you covered. See the prices below of the cheapest insurers offering this coverage.

Monthly Premiums of The Cheapest Companies that offer GAP Insurance

Things to Know About GAP Insurance

Gap insurance doesn’t cover deductible costs.

Your GAP insurance refund will be equal to the amount that’s left on your loan minus your deductible. For example, if there is $3,000 left on your loan after your vehicle is totaled, and your deductible is $500, you will receive $2,500.

You don’t need GAP insurance if you have new car replacement coverage.

New car replacement is a protection plan very similar to GAP insurance. If you buy this coverage and total your vehicle, an insurance company will replace it with a brand new car that’s the same make and model. Many manufacturers offer this coverage for cars less than three years old, while Travelers (check our review) provides up to five years.

The two major differences between these two coverages are that GAP insurance is tied to a loan, and it can be utilized for used vehicles too.

GAP auto insurance does not cover engine malfunctions, fender benders, and similar accidents.

Remember, the payout for this coverage is triggered only if a vehicle is totaled in a covered accident. Collision and comprehensive coverages pay for any damage to your car, and mechanical protection coverage pays for engine failure.

GAP insurance covers theft.

If your vehicle is stolen, and the authorities are unable to recover it, you will receive a GAP auto insurance payout.

GAP Insurance does not pay any medical expenses, including death benefits.

GAP insurance only provides a payout if your vehicle is totaled. Any expenses related to bodily injury or lost wages are not covered.

GAP insurance does cover negative equity.

Negative equity is synonymous with the gap between the ACV of your car and the amount left on your loan.

Conclusion

Whether you want to include GAP insurance in your quote or the coverage is included with the lease agreement, now you know how it works. It’s essential to calculate when exactly you will stop needing it so that you can cancel it and save money.

As with any other insurance coverages, the offers vary across the market. Since there are more than 30 companies in the US that offer GAP insurance, negotiating and shopping around pays out more than ever.

Frequently Asked Questions

What is GAP insurance, and how does it work after a car is totaled?

GAP insurance by definition is a type of car insurance coverage that pays the amount left on your loan if your car is totaled. For example, if the actual cash value of your vehicle is $12,000, and there’s $15,000 left on your loan, you will get $3,000 minus whatever your deductible is from the insurance company.

Does State Farm offer GAP Insurance?

Yes, you can buy GAP insurance from State Farm.

How long does GAP insurance last?

It all depends on the deal between you and a lender/insurance company, but it usually lasts until the end of a loan. When the actual cash value of your vehicle exceeds the amount left on the loan, it’s smart to cancel your GAP insurance. Use KBB to verify the exact worth of your car.

Does Geico Offer GAP Insurance?

No, this company currently does not offer this coverage.

What is GAP insurance on a car loan?

It is GAP insurance that’s bundled in your loan deal, instead of bought separately from an insurance company. Read loan deals carefully before you sign, and inquire about GAP insurance.

How do I know if I have GAP insurance?

This insurance can be included in a lease deal or purchased separately from an insurance company. Carefully read your loan deal before you sign it, and ask if GAP insurance is provided. If not, you can contact your insurance company and add it to the policy.

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