What You Should Know about GAP Insurance
When It Might Be Necessary
Guaranteed Auto Protection—or GAP insurance—makes up the difference between the actual cash value of an automobile and the amount still owed to a finance company. With finance plans that sometimes spread payments over terms as long as 72 months, automobile owners can find themselves owing more on a vehicle than it actually is worth. In the event of a total loss, insurance companies typically pay only the actual cash value of the vehicle.
GAP insurance covers a total loss to a vehicle in the event of fire, theft, vandalism, flood, accident, tornadoes, or hurricanes. Any loss normally covered by comprehensive or collision insurance also is covered by GAP insurance. Some policies cover the insurance deductible. If a GAP policy covers a deductible, the deductible amount is not refunded back to the vehicle owner. Instead, the amount of the insurance deductible is applied to the amount of the insured’s unpaid loan balance. Car owners should check their own GAP policies to make sure they know exactly what is covered if a total loss occurs.
Always read the policy carefully to find out what is excluded.
If a vehicle is not fully covered by both comprehensive and collision, there is no additional coverage provided by GAP insurance. Extended warranties, overdue loan payments, and equipment added to the vehicle that was not factory-installed also are not covered. If a car owner still owes on a vehicle and purchases a new one, rolling over the balance, GAP insurance will not cover the carryover payment.
Car owners who finance vehicles through their own banks or credit unions or through lenders partnering with dealerships are eligible for GAP coverage. However, if a car is purchased through a line of credit such as a home equity line of credit, the vehicle is not eligible for coverage.
People who purchase vehicles with little or no down payment who have license and tax fees added to the cost of their loans easily could end up owing more on their car than it is worth. Any time the auto loan amount exceeds the value of the vehicle, gap insurance provides value.
GAP insurance is most helpful for cars financed for more than 48 months. Long-term finance agreements help people who otherwise couldn’t afford the monthly car payments. For those who have longer finance terms, the amount of time they owe more on their car than it is worth will be longer, and GAP insurance can help offer financial protection for that period of time.
Where to Purchase
Gap insurance typically is available as an option that can be added to an auto insurance policy, and it also can be purchased as a standalone policy through lenders financing car loans.
It is rare for GAP insurance to be required to finance a car, but some dealerships will include it as a standard part of a purchase contract. Buyers should read their contracts thoroughly and ask the dealership to remove GAP coverage if it is something they do not wish to purchase.
It's also a good idea to shop around for GAP insurance. Adding it to a current insurance policy might be cheaper than purchasing it through a dealership, so buyers should check into this option before agreeing to whatever price a dealership is charging.
Reasons for not Purchasing Gap Insurance
Not everyone needs GAP insurance. The coverage serves no purpose if the value of the car exceeds the amount owed, and car owners secure in their financial situations may deem the premiums to be an unnecessary expense. Car buyers who finance their vehicles for short-term loans such as six months or one year are less likely to need the coverage.
If the insured has a GAP waiver, there is no need to purchase GAP insurance. With such a waiver, the lender agrees to waive the difference between the actual cash value and what is owed on the vehicle in the event of a total loss. This is slightly different than an insurance policy that provides coverage than the difference, but it amounts to roughly the same value to a borrower.
After a vehicle is paid off, any unearned premium is refunded to the insured. For instance, if a vehicle is financed for 48 months but is paid off in 24 months, two years’ worth of premium charges are due back to the insured as GAP coverage is normally paid for in advance.
In addition, a car owner who sells or refinances a vehicle also is owed a refund.
Consumer Financial Protection Bureau. "What is Guaranteed Auto Protection (GAP) Insurance?" Accessed March 13, 2020.
Federal Trade Commission. "Financing or Leasing a Car." Accessed March 13, 2020.
New York State Department of Financial Services. "GAP Waivers and GAP Insurance." Accessed March 13, 2020.