What is gap insurance?
Gap insurance is an optional auto insurance coverage that applies if your car is stolen or deemed a total loss. When your loan amount is more than your vehicle is worth, gap insurance coverage pays the difference. For example, if you owe $25,000 on your loan and your car is only worth $20,000, your gap coverage covers the $5,000 gap, minus your deductible.
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Key takeaways
Gap insurance is an optional coverage available from car insurers and dealers
It can help pay off your loan if your car is stolen or totaled and you owe more than it's worth
Progressive's loan/lease payoff coverage works similarly to gap insurance
How does gap insurance work?
Insurance with gap coverage 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 auto coverage and without:
How the gap happens
For a quick comparison, this table shows the same example from the images and what you may owe with and without gap coverage.
| Accident | Without gap insurance | With gap insurance |
|---|---|---|
| Physical damage insurance pays | Without gap insurance$22k | With gap insurance$22k |
| Gap coverage pays | Without gap insurance$0 | With gap insurance$5k |
| You still owe | Without gap insurance$5k | With gap insurance$0 |
| Outcome | Without gap insuranceYou're responsible for the $5k gap. | With gap insuranceThe gap is covered. |
While you don't legally need comprehensive and collision coverages to drive, insurers generally require them to buy gap insurance.
Pro tip:
Progressive offers loan/lease payoff coverage, which is similar to gap insurance coverage. The main difference is that the payout for Progressive's 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 typically applies in these situations:
- Your vehicle is stolen and not recovered
- Your vehicle is 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 insurance 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.
Watch our quick guide to learn more about gap insurance:
What doesn't gap insurance cover?
Gap coverage on your auto insurance may not cover:
- Additional charges related to your loan, like finance or excess mileage charges
- Other property or injuries resulting from an accident
- Engine failure or other repairs
Who needs gap insurance?
When there's a significant difference between your car's value and what you owe on it, gap coverage can be a valuable safeguard. Consider buying insurance with 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% of the sale price, you could end up with negative equity on the vehicle as soon as you drive away from the dealership. Do the math on this even if you're buying used — gap insurance for used cars can protect you from negative equity just like it does for new cars.
- You have a longer financing term for your vehicle: The longer your vehicle is financed, the higher your 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 calculating the average depreciation for your car could help you determine if you need gap coverage.
- You have a loan rollover: If you owe more on your loan than your car is worth at the time of renewal, gap insurance can help protect you against the negative equity.
Is gap insurance required?
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 car insurance policy and car lease or sale documents to find out if you have gap insurance.
How much is gap insurance?
The cost for gap coverage varies by insurer. According to the Insurance Information Institute, car dealerships may offer you gap insurance, but auto insurers typically charge less than dealerships for it.
If you want an exact price for Progressive's loan/lease payoff insurance, 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 gap insurance.
How to purchase gap insurance
How you purchase gap insurance can come with advantages or disadvantages. Consider whether you'll buy gap insurance through your:
- Auto insurer: This may be the most affordable and straightforward option, as gap insurance (or loan/lease payoff) can be added to an existing policy with comprehensive and collision coverages.
- Car dealership: Gap insurance may be available through the dealer when you finance or lease a vehicle, but you may end up paying interest on your gap coverage due to the bundled lease/loan payment. It can cost more than getting gap insurance through your auto insurer.
- Lender/credit union: These institutions may offer gap coverage as part of your financing agreement.
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