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What is Gap Insurance and How Does it Work?

Published: November 2017

Gap insurance is an optional car insurance coverage that helps pay off your auto loan if your car is totaled and you owe more than the car's depreciated value. Gap insurance may also be called "loan/lease gap coverage."


How Does Gap Insurance Work?

If you're leasing or financing a new car, many lenders require you to have collision and comprehensive coverage on your car insurance policy until your car is paid off.

Gap insurance is meant to be used in conjunction with collision coverage or comprehensive coverage. Say you bought a brand-new car for $25,000. You still owe $20,000 on your auto loan when the car is totaled in a covered collision. Your collision coverage would pay your lender up to the totaled car's depreciated value — say it's worth $19,000. If you don't have gap insurance, you would have to pay $1,000 out of your own pocket to settle your auto loan on the totaled car. If you have gar insurance, your insurer would help pay the $1,000.

Keep in mind that, in the above scenario, the car insurance reimbursement goes completely to your auto lender to pay off a car that's no longer driveable. If you think you would need help buying a new car after yours was totaled, you might want to consider purchasing new car replacement coverage. Some insurers sell loan/lease gap coverage and new car replacement coverage together, as a single insurance endorsement for a brand-new car.

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Can You Get Gap Insurance After You Buy a Car?

You may be able to get gap insurance after you buy a car. Gap insurance isn't just sold at car dealerships — many insurers, including Allstate, offer gap insurance as part of a car insurance policy. And, according to the Insurance Information Institute (III), buying gap coverage from an insurance company often costs less than buying it from a car dealership.

Some insurers require your vehicle to be brand new in order for you to purchase gap insurance. That may mean:

  • That you are the original owner of the vehicle
  • That the vehicle is not older than two or three model years

Check with your insurer to see what qualifications are required for you to buy gap insurance.

Is Buying Gap Insurance Worth It?

If you're considering buying gap insurance, think about how much you owe on your auto loan versus the value of your car. (You can get an estimate of what your car is worth by checking a site like Kelley Blue Book.) Do you owe more than your car is worth? Could you afford to pay the difference out of pocket if your car is totaled?

According to the III, you may want to consider gap insurance if you made less than a 20 percent down payment on your vehicle; if your auto loan is 60 months or longer; or if you're leasing a vehicle. If you're leasing a new vehicle, Consumer Reports notes that many lease contracts include gap coverage; check yours to see whether you have coverage.

In What Situations Does Gap Insurance Apply?

Gap insurance coverage may apply if you're "upside down" on your auto loan when your vehicle is stolen or totaled. "Totaled" means that repair costs exceed the value of the vehicle. Whether a vehicle is declared totaled depends on state laws and your insurer's discretion.

Have questions about gap insurance? Contact a local agent, who can help explain your options.

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This content is for informational purposes only and may not be applicable to all situations.

Coverage subject to terms, conditions, and availability. Policy issuance is subject to qualifications. Allstate Insurance Company, Allstate Indemnity Company, Allstate Fire and Casualty Insurance Company, Allstate Property and Casualty Insurance Company, Northbrook, IL. © 2018 Allstate Insurance Company, Northbrook, IL.
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