What Time Frame Is Allowed to Buy Gap Insurance?

Person holding a graphic of a car representing gap car insurance
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If you plan to finance a car purchase or if you are planning to lease a new vehicle, you may want to consider purchasing gap insurance. Gap insurance covers the "gap" between the amount you still owe on your auto loan and your car’s actual cash value (ACV) as determined by your insurance carrier at the time of an auto accident that results in a total loss of usability or if the car is stolen. Ultimately, you are still held responsible for making the remaining loan or lease payments and while gap insurance is not required by law—like liability insurance—it can relieve significant financial pressure if your car is totaled or stolen.

Time Frame for Purchasing Gap Insurance

Gap insurance for new cars that are financed or leased can be purchased from several sources, including the dealer, finance company, current insurance carrier and online specialty companies. Gap insurance is not to be confused with an extended warranty, which can be purchased for both new and used vehicles from dealers and online warranty providers. If you are interested in purchasing gap insurance, it is helpful to remember that in many situations, you have to be the original loan or lease-holder on the vehicle and you should select the coverage shortly after making your new car purchase. While there may be some gap insurance carriers that will insure a gently used car, it is important to review carrier guidelines and understand the role of depreciation in making your purchase.

The three most critical factors you should consider when deciding to add gap insurance to your vehicle includes the amount of money you put down, the length of your loan/lease term, and the type of vehicle. As the first two or three years is typically when you are most likely to owe more than what insurance will pay for a total loss or theft of your vehicle, these factors determine your need for gap insurance. If you've put little money down, have an extended loan/lease term, and/or have purchased a vehicle that depreciates quickly, gap insurance may be right for you.

Buy From Your Lender

Though your lender will likely offer gap insurance when you finance your new car, as well as an extended warranty, this will likely be the most expensive option. Unless you are leasing a vehicle and the financing company requires you to purchase gap insurance directly through them, you can find lower cost gap insurance coverage elsewhere. Most major auto insurance carriers offer gap insurance and when you call to inquire about the cost of insurance on the new vehicle prior to purchase, ask your insurance agent about gap insurance options.

Buy From Your Car Insurance Company

Gap insurance through your car insurance carrier is often reasonably priced. Spending an extra $10- to $20 per month is worth the additional expense should you ever find yourself in a situation where your car has been totaled or stolen. Different carriers have different guidelines for offering gap insurance and make a point to ask not only about gap insurance, but also about other types of coverage like "new car" replacement, "better car" replacement, and loan/lease payoff.

The Difference Between Gap Insurance and Loan/Lease Payoff

Loan/lease payoff coverage is similar to gap insurance, and is a term sometimes used interchangeably with gap insurance. Depending on the carrier, loan/lease payoff coverage may be the same as gap coverage, and you should always check with your agent to make sure there isn't a difference in coverage. Some carriers that offer loan/lease payoff coverage only cover a percentage of your car's ACV when totaled or stolen, typically around 25%. Ask your agent about all coverages available to you—including new car replacement—and take the time to understand the terms and conditions of those coverages to help you make the best decision in insuring your new car and your financial security.

Article Sources

  1. Carfax. "Car Depreciation: How Much Value Will a New Car Lose?" Accessed July 8, 2020.

  2. Insurance Information Institute. "What Is Gap Insurance?" Accessed July 8, 2020.

  3. Sun Coast General Insurance Agency. "Loan/Lease Payoff Coverage." Accessed July 8, 2020.