Contributor, Benzinga
Updated: September 26, 2022

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Quick Look: The Best Gap Insurance

If you owe money on an auto loan or you’re currently leasing your vehicle, investing in gap insurance is a no-brainer. Gap insurance can help you pay off the difference between the actual value of your vehicle and the amount that you owe on your loan or lease in the event that you total your car. Don’t wait until it’s too late — learn more about gap insurance coverage and your options with our guide.   

The Best Gap Insurance Companies

Most car buyers tend to favor gap insurance through auto insurers because the coverage is affordable and is easy to cancel when no longer needed. Also, any questions or issues can be quickly addressed with your car insurance agent.

1. Progressive

Now the third-largest auto insurance provider in the U.S., Progressive offers proven value and has been protecting families since 1937.

Gap insurance, also called loan/lease payoff, can be added to your collision and comprehensive coverage. Progressive’s gap coverage is limited to 125% of your vehicle’s actual cash value and may not cover your deductible.

However, the gap is minimized and the monthly cost is easy to justify.

2. State Farm Bank Gap Insurance

State Farm states in the fine print that its Payoff Protector, included with a State Farm Bank auto loan, is not an insurance product. Instead, it’s a free benefit that comes with your loan and bridges the gap between an insurance payout and your loan balance.

There is no requirement to have your car insured with State Farm, but collision and comprehensive coverage are required for the loan. Rates are competitive as well, which makes State Farm an attractive choice if you want to save money without sacrificing protection.

3. GAP Direct

With gap coverage similar to what you might find at a dealer, GAP Direct ticks all the boxes without the expense of dealer-purchased gap insurance.

Both loans and leases can be covered with options for 2- or 3-year coverage terms. Renewal terms are also available. Pricing starts at a flat fee of $185 and provides coverage for up to $25,000 of the remaining loan balance.

In most states, GAP Direct can cover up to $1,000 of your deductible as well. GAP Direct policies are provided through Western General Insurance Company, a California-based insurer with nearly 50 years of experience.

4. Allstate

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Availability varies by state, but Allstate’s guaranteed asset protection holds its own when it comes to protecting your finances.

Gap coverage is available for vehicles valued or financed up to $100,000. However, covered losses are limited to $50,000, which is still higher than some competitors.

Deductibles up to $1,000 are covered as well, which reduces your out-of-pocket expenses further if you have a total loss. Allstate’s guaranteed asset protection is part of a suite of consumer products sold through authorized dealers nationwide.

5. American Family

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With a history of insuring cars, trucks, and families dating back nearly 100 years, American Family provides an affordable endorsement to cover the gap on auto leases and loans.

American Family works with thousands of independent agents throughout the U.S. and offers a wider range of insurance products than many big-name insurers.

You’ll need to have an auto insurance policy with American Family and carry collision and comprehensive coverage for the insured vehicle to qualify for gap coverage. If you’re in one of the 19 states serviced by American Family, consider adding them to your list when shopping for gap coverage.

What is Gap Insurance?

Gap insurance is a type of supplemental policy that can be added onto your car insurance policy if you’re leasing your car or if you paid for your vehicle using an auto loan. Gap insurance is an acronym for “guaranteed auto protection” and it does guarantee auto protection — but it also guarantees financial protection as well if you’re involved in a major accident.

Gap insurance provides payment that is considered the difference between the value of the car when you first got it (the balance of its lease or loan) and the value at the time of the incident, whether your car was stolen or totaled.

Gap Insurance Explained

Auto insurance is necessary in order to keep your wallet safe and remain on the road in good standing. Without insurance, you can be left paying thousands of dollars in the event of an accident. You probably already have liability insurance, which will compensate anyone who you injure in an accident, as this is required in most states. Other types of coverage (including collision and comprehensive coverage) are considered optional.

Even though these coverages aren’t legally required, a lot of things can happen to leave you with a hefty expense if you don’t have the right coverage. 

When you buy or lease a car, the vehicle begins to depreciate in value as soon as you drive it off the lot. 

Gap insurance covers the amount you owe on a new car loan balance and the amount an insurer will pay in a total loss claim. In the event of a total loss due to theft or an accident, any amount remaining on the loan and not covered by auto insurance still has to be paid. For many newer vehicles, particularly those with longer loan terms, the remaining balance could be thousands of dollars. Gap insurance covers this difference.

How Does Gap Insurance Work?

Gap insurance helps to pay the money that is owed on a car loan when a car is totaled or stolen. If you’re still in the early years of your car payments, odds are you owe more for the car than it’s actually worth, as even the best vehicle begins to lose value as soon as you buy it. Unfortunately, if your car is deemed a total loss due to a theft or a major accident, your insurance company will only pay up to the current value of the vehicle — regardless of what you actually owe on your loan. 

For example, imagine that you bought a car for $20,000, but one day you get into an accident and total the car. You still owe $19,000 on the car even though the car has depreciated in value to $17,000.  If you have collision coverage, your insurance provider will help you pay for the cost of a replacement vehicle. However, because the vehicle has depreciated in value to $17,000, the maximum payout that your insurance will provide to you is $17,000. The payout leaves you with $2,000 left on your loan for a car that you no longer have access to. 

What do you do now? Without gap insurance, you would have to pay that $2,000 out of pocket. However, if you have gap insurance, your insurance provider will cover that difference of $2,000, helping you clear your loan and start fresh.

Gap insurance provides a supplement to your insurance payout, which leaves you free from having to make payments on a car that is completely useless onced totaled. You can file a claim with gap insurance, just like you would with any other type of insurance. If you’re leasing a vehicle, your leasing agent will likely file a claim because they’re listed as a payee on your insurance policy. Some leasing agents require you to have gap insurance coverage as a term of your lease. 

It’s pertinent to note that gap insurance does not cover replacement costs. If your car is a total wreck and a lost cause, then the insurer that provides you with your gap insurance will not provide you with any amount to replace the vehicle. All the money you receive from your collision and gap insurance will go towards paying back what you owe on your lease or loan. 

Gap insurance can cost as little as $20 a year when you add it to your existing comprehensive auto insurance policy. The cost of gap insurance varies depending on the same factors that any insurance policy takes into consideration: your age, your driving record, the state you live in and the model and make of your vehicle. 

When Should You Get Gap Insurance?

You can purchase gap insurance immediately upon buying or leasing your car. However, if you don’t invest in a policy at the time of purchase, you should consider it within 3 years of buying or leasing the car. The period of 3 years is the time when you usually see a high loan or lease balance as well as sudden and drastic depreciation, which is when gap insurance is most useful. 

Even if your insurance provider doesn’t offer gap insurance, you may want to consider shopping around for gap insurance and an auto insurance policy with other insurance providers. You should get gap insurance if you made a down payment of less than 20%, you financed the vehicle for 60 or more months, you leased the vehicle or you bought a vehicle that depreciates more than other cars.  

Some lease agreements include gap insurance coverage, so be sure that you’re clear on what is in your lease to avoid doubling up on insurance coverage. In addition, some lenders may require you to get gap insurance, especially if you’re financing a car that loses value quicker than your average car. These types of cars tend to be SUVs, luxury sedans or sports utility vehicles. 

You may think that you don’t need gap insurance if you have a comprehensive auto insurance policy. However, this isn’t the case under most circumstances. While comprehensive insurance does provide full coverage for a wide range of damages that you might see to your vehicle, it still only covers you up to the actual value of your vehicle. 

Gap insurance can still provide coverage for the difference alongside a comprehensive insurance policy. You can also consider getting rid of your gap insurance once the amount you owe on the car is at the same or lower than the amount that the car is valued at.  

Signing Up for Gap Insurance

When you’re in the finance office at the car dealership, your dealer will likely discuss gap insurance with you -- but be sure to bring it up if they don't!

If you're leasing your car or using an auto loan to purchase it, you may have to get gap insurance. This is especially common for leases. If you have your own lender, check with your lender, bank or credit union to see if they offer gap coverage. Often, the difference in cost can be hundreds less than the car dealer’s coverage offer.

You can also check with your insurer to see if they offer gap coverage as an add-on for your policy. It may be worth your while to switch car insurance companies to bundle car insurance with gap insurance.

There are also a handful of standalone providers that sell directly to the public, although many of the companies providing gap insurance market exclusively through dealers, lenders or similar third parties.

Premiums and Reimbursements

In most cases, buying gap coverage at the dealer is the most expensive option. Expect to pay $500 to $800 at the time of purchase. While this is a one-time fee, if it’s rolled into the financing, you could be paying interest on the balance for a long time.

Gap insurance provided through lenders may be a one-time fee or it may be included as a benefit with your financing, as with State Farm’s Payoff Protector included with auto financing through State Farm Bank.

When choosing coverage through your auto insurer, expect to pay between $5 to $20 additional each month to cover the premium for gap coverage. As with car insurance rates, premiums for gap coverage can vary depending on a number of factors.

If you’ve purchased gap insurance through the dealer or as a standalone policy, you can cancel your coverage when you no longer need it. Often after 3 to 4 years of making payments, there isn’t a gap to insure anymore. Most insurers will refund the unused portion of your payment as unearned premiums. For financed gap coverage, the refunded amount will reduce your auto loan balance.

Who Needs Gap Insurance?

Gap insurance isn’t required by law but it may be required by lenders and there are several scenarios in which it's beneficial to consumers.

Many gap insurance providers suggest getting this if you put down 20% or less as a down payment or if you have a loan term longer than 4 years. In either of these cases, the balance on the loan may be higher than the value of the car in a total loss insurance claim during the first years of ownership.

Here's an example.

If you bought a new car for $35,000, you can expect the car to depreciate by about 20% on average. That’s $7,000 in the first year. After the first year, depreciation tends to slow down to about 10% of the car’s original value per year. The loan balance often takes a bit longer to go down.

If you took a 72-month loan at 5% interest and put down enough to cover tax and tags, after a year you’ll still owe nearly $30,000. However, in a total loss insurance claim, your insurer is likely to pay about $27,000 due to depreciation.

If you have a $1,000 deductible, the claim payout is cut down to $26,000, which leaves a $4,000 gap that you’ll have to cover out of pocket.

Think of gap insurance as a last line of defense if, for some reason, you totally write off a car. This is the sort of thing you purchase because it makes good sense, even if you never need to file a claim. Benzinga has heard stories of young professionals buying cars and writing them off quickly (through no fault of their own.) Because young professionals are still building their nest egg and financial flexibility, they don’t have the money to pay off a totaled vehicle.

The same is true of seniors or those on a fixed income. You may also want to purchase gap insurance for teenagers if you finance their first vehicle. And finally, gap insurance is a very good choice for businesses that send their vehicles in the field every day. The more miles the car drives, the more risk it takes on every day.

What to Look for in Gap Insurance

Some options cost several hundreds of dollars and car buyers should weigh their needs carefully. Less expensive coverage that covers most of the gap might be sufficient and more affordable.

Is the Deductible Covered? It’s common to have a deductible of between $500 to $1,000 for collision or comprehensive claims. The deductible is an extra expense in addition to the gap between the loan value and the insured value of the car. Ask if the deductible is covered as part of gap coverage.

Is the Company Reputable? When shopping for standalone providers, you’ll encounter some companies you’ve never heard of before. Do your research and read reviews and BBB ratings before you make a purchase.

Can You Cancel Your Coverage? Gap insurance usually isn’t needed for the life of the loan. Ask about cancellation and refunds. In some cases, it will automatically be removed from the policy once the vehicle reaches a certain age.

Is Your Premium a Percentage of the Gap? Paying a lump sum of $600 to $800 is high for a potential gap of a few thousand dollars. Compare the cost to your financial exposure before choosing a gap insurance provider.

Get Gap Insurance for Peace of Mind

Gap insurance is important for anyone who is buying or leasing a car. While gap insurance isn’t a required coverage in any state, you could be left on the hook for thousands of dollars if your vehicle is stolen or totaled and you still owe money on your loan or lease. Leasing agents may require you to get gap insurance before you complete the purchase.

When compared to other types of auto insurance protections, gap insurance is exceptionally affordable. Depending on where you buy your coverage, you may pay just $20 a year for your coverage. If you’re involved in an accident, that $20 annual payment could end up saving you thousands of dollars. 

Questions & Answers

Q
Why do I need gap insurance?
A

If you’re involved in an accident and your vehicle is totaled, your collision insurance will only pay up to the current value of the vehicle. Gap insurance fills in the “gap” between your car’s value and your loan balance.

Q
Can you get gap insurance after you buy a car?
A

Some insurers will only sell gap insurance policies to drivers buying a new vehicle, while others will sell a policy years after you buy your car. Consult with your insurance provider or the dealer.


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