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What is Gap Insurance and How Does it Work?

Updated: January 2019

Gap insurance is an optional car insurance coverage that helps pay off your auto loan if your car is totaled or stolen and you owe more than the car's depreciated value. Gap insurance may also be called "loan/lease gap coverage." This type of coverage is only available if you're the original loan- or leaseholder on a new vehicle. Gap insurance helps pay the gap between the depreciated value of your car and what you still owe on the car.


Video Transcript

[On screen] Do I Need Loan or Lease Gap Coverage?

[Voiceover] Buying a new car is a major purchase — and an exciting one.

Congratulations!

Don't forget to think about your insurance needs.

The coverage you had on your previous vehicle may not be sufficient for your new car.

New car replacement coverage is one type of optional coverage you may want to consider.

You may choose to purchase this in addition to the coverage you are required to buy.

Most lenders typically require comprehensive and collision coverage.

These coverages help pay to replace a totaled car, but they factor in depreciation.

Due to depreciation, your new car loses value as soon as you drive it off the lot.

Say you bought a new car for $25,000.

Shortly after, your car was totaled in a covered collision.

Your collision coverage would pay up to the car's depreciated value — for example, $20,000.

That wouldn't be enough money to buy the same brand-new car that costs $25,000.

But, if you had new car replacement coverage, you would be able to replace your totaled car with a new one of the same or similar make, model and equipment.

If you own a brand-new car, consider adding this optional coverage to your car insurance policy.

Check with your insurer to see if your vehicle qualifies.

WHY DO I NEED GAP INSURANCE?

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. If you have a covered claim, your collision coverage or comprehensive coverage would help pay for your totaled or stolen vehicle up to its depreciated value. According to the Insurance Information Institute (III), when you drive a brand-new vehicle off the lot, its value immediately decreases. And, most vehicles' value depreciates about 20 percent in the first year of ownership. But, what if you still owe more on your loan or lease than the vehicle's depreciated value? That's where gap insurance may help.

But, what if you still owe more on your loan or lease than the vehicle's depreciated value? That's where gap insurance may help.

HOW DOES GAP INSURANCE WORK?

Here's an example of how gap insurance may work: 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 gap 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 add-on to a car insurance policy for a brand-new vehicle.

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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, depending on the model year of the vehicle. 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 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 (you have the original lease or loan on 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.

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, it's important to remember that this type of coverage may only be available if you're leasing or financing a new vehicle. Then, 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 in the following situations:

  • If you made less than a 20 percent down payment on your vehicle
  • If your auto loan is 60 months or longer
  • 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 under water on your auto loan (meaning, you owe more than the car is worth) 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. © 2019 Allstate Insurance Company, Northbrook, IL.
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