Gap Insurance: What It Is And How It Works

If your car gets totaled or stolen, the last thing you want to hear is that you owe more on the car loan than the car is worth.

If you have collision or comprehensive coverage, your car insurance company will pay the value of your car in a total loss settlement, not what you owe on a car loan or lease. But if you owe more on your car than what it’s worth, gap insurance can help bridge that gap.

What Is Gap Insurance?

Gap insurance is optional car insurance coverage that helps bridge the financial gap for drivers whose car loan balance is more than what their vehicle is worth if it’s totaled.

How Does Gap Insurance Work?

If your vehicle is totaled in a situation covered by collision or comprehensive insurance, the maximum claim payout from your insurer is the value of the vehicle right before the incident Gap insurance, sometimes called loan/lease coverage, covers the difference between what you owe and the value of your totaled or stolen vehicle.

You must have collision and comprehensive insurance in order to buy gap coverage.

Here’s how a typical gap insurance claim works:

If your vehicle is stolen or totaled in an accident covered by your auto insurance, you’ll make a claim on either the collision or comprehensive insurance portion of your policy (whichever coverage applies). Your insurer will pay your lender the actual cash value (ACV) of your car. If you owe more on your loan than the ACV, gap insurance can cover the difference.

Example of How Gap Coverage Can Help


Car loan left to pay	$20,000
Actual cash value of car	$17,000
Comprehensive or collision deductible	$500
Insurance company pays lender	$16,500
How much you would still owe lender without gap insurance	$3,000

If you don’t have gap insurance and the outstanding balance of your loan or lease is more than your car’s value, you’ll be responsible for paying off the rest of the loan yourself. In our example above, gap insurance would cover the $3,000 still owed to the lender, so you wouldn’t have to find the money to pay that out personally.

Some lenders or leasing companies require gap insurance. It helps protect them from car owners who walk away from a loan or lease if the car is totaled or stolen.

Some gap insurance policies might cover you for the total loan balance, including negative equity rolled into your new car loan. For example, if you trade in a car on which you owe more than it’s worth, that negative equity is rolled into your new loan. However, not all gap insurance policies will cover negative equity, so make sure you buy a policy that does if you rolled negative equity into your new car loan.

When you no longer need gap insurance—because your loan balance is about equal to or lower than your vehicle’s value—you can drop it from your policy.

What Does Gap Insurance Cover?

Gap insurance covers the difference between what you owe on a car lease or loan and the amount paid out in a total loss settlement from an auto insurer, minus your deductible. There is only a “gap” to cover if you owe more on your car than it’s worth.

Does Gap Insurance Cover Theft?

Yes, gap insurance will pay if your car is stolen.

Does Gap Insurance Cover Engine Failure?

No . Gap insurance doesn’t cover engine failure. Gap insurance only pays out after a total loss of your vehicle, such as an auto accident or theft of your car. Mechanical issues on their own are not covered by car insurance or gap insurance.

Does Gap Insurance Cover Transmission Failure?

No. Gap insurance doesn’t cover transmission failure or any other mechanical repairs.

Does Gap Insurance Cover Death?

No. Gap insurance coverage strictly pays out based on the total loss of your vehicle and doesn’t cover injuries, death or funeral costs.

The liability portion of a car insurance policy covers accidental death to others. If you have personal injury protection or medical payments coverage it can cover funeral fees for you and your passengers.

Does Gap Insurance Cover Your Deductible?

No. Gap insurance purchased through a car insurance company usually doesn’t cover your collision or comprehensive deductible amount.

This means if you have a $3,000 gap after your collision insurance pays out and have a $500 collision deductible, gap insurance will pay $2,500. The $500 remaining is the deductible amount.

Some gap insurance policies offered at dealerships will pay your primary insurance policy’s deductible. But be aware that gap insurance purchased from a dealer is typically much more expensive than buying gap coverage from a car insurance company.

What Doesn’t Gap Insurance Cover?

Here are some common expenses gap insurance doesn’t cover:

Your car insurance deductible.
Overdue payments and late fees on your car loan or lease.
Security deposits.
Extended warranties.
Carry-over balances from previous loans or leases.
Lease penalties for high mileage or excessive use.
Charges for credit insurance connected to the loan.
A down payment for a new car.

Do I Need Gap Insurance?

Whether you need gap insurance depends on how much you have left on your car loan or lease and what the vehicle is worth. If you have enough money not to care about the “gap,” you likely don’t need gap insurance.

For example, if your car is currently worth $10,000 and you owe $12,000 on the loan, you might be willing to absorb the difference if your car is totaled. But if you have a $30,000 car loan on a $22,000 car, you might not be able to afford to pay the $8,000 gap. In this case, you may decide you do need gap insurance.

Is Gap Insurance Worth It?

The relatively small cost of gap insurance can be worth it if you owe significantly more on your car loan or lease than what the vehicle is worth.

Gap Insurance May Make Sense If…

You lease your car.
You took out a car loan of five years (60 months) or longer.
You financed most of the car and made a small down payment of your car of less than 20%.
You rolled negative equity from your last car loan into your new car loan (make sure you get a policy that covers negative equity).
You bought a vehicle that depreciates in value faster than other vehicles (more on that below).

If you currently have a car loan or lease, you can check the value of your car on a website such as J.D. Power and compare it to your car loan/lease balance. The difference between the two is the gap.

Gap Insurance May Not Make Sense If…

The amount you owe is less than the car’s value, or only a little more.
You can afford to pay the difference between the amount owed and the car’s value.

Once the amount you owe is less than the car’s value, or only a little more, there’s no reason to keep gap insurance. That’s because there will be little or no gap insurance payout possible. For example, if you owe $15,000 and your car’s value is $17,000, there won’t be a gap if your car is totaled or stolen.

And if you sell your car, you should cancel gap insurance.

Where Can I Buy Gap Insurance?

You can typically buy gap insurance from:

Car insurance companies
Car dealerships
Banks and credit unions

Insurance Companies That Sell Gap Insurance

Many car insurance companies that offer gap insurance, such as:

Not every car insurance company sells gap insurance and it may not be available in every state. For example, Geico and Farmers don’t sell gap insurance.

Cost of Gap Insurance

Gap insurance costs an average of $61 a year, according to Forbes Advisor’s analysis.

Gap insurance is much cheaper through a car insurance company compared to a car dealership. Buying gap insurance from a car dealership might seem convenient, but it can often end up costing you more in the long run. Car dealerships typically charge up to $600 for gap insurance that can be added to your loan, according to Trusted Choice, a group of independent insurance agents.

The cost of gap insurance could be rolled into your car loan, but that means you’ll also be paying interest on it. You’ll also lose the flexibility to cancel the gap insurance since it’s tied to your loan, so you might end up paying for something that’s no longer useful.

Cost of Gap Insurance by Company

Company	Average annual cost of gap insurance
Travelers	$34
Progressive	$38
Auto-Owners Insurance	$48
American Family	$51
State Auto	$52
Erie	$58
Shelter	$141
Westfield	$70
Average	$61

Alternatives to Gap Insurance

Some car insurance companies offer other types of coverage that sound similar to gap insurance. Here are two alternatives to gap insurance that might interest you.

New Car Replacement Coverage

New car replacement coverage reimburses you enough to replace your totaled or stolen vehicle with a new car.

That’s different from the actual cash value, which factors in depreciation. Your vehicle must meet age and mileage requirements to take advantage of new car replacement coverage.

There’s generally a deductible attached to new car replacement coverage.

Here are examples of companies that offer this coverage:

Amica: Amica’s new car replacement coverage is part of its Platinum Choice Auto package. The new car replacement coverage for Amica replaces a totaled vehicle with a new car if it’s under a year old and has fewer than 15,000 miles on it.
Farmers: Farmers offer new car replacement coverage for a vehicle of the same make and model if your car gets totaled within the first two model years and 24,000 miles.
Nationwide: Nationwide provides new car replacements for a vehicle less than three years old.

As you can see new car replacement coverage varies significantly by company, so make sure to read the fine print and understand exactly what you’re getting if you want new car replacement protection.

Better Car Replacement Coverage

Some car insurance companies, such as Horace Mann and Liberty Mutual, offer “better car replacement” coverage. This reimburses you for a newer or better model of your totaled car. This coverage may also have mileage parameters. For example, Liberty Mutual will reimburse you for a vehicle that’s one model year newer and with 15,000 fewer miles than the vehicle that was totaled.

The optional coverage is only for policyholders who own their cars. It’s not available for leased cars.

Pros and Cons of Gap Insurance

Pros of gap insurance	Cons of gap insurance
Covers the insurance gap when you owe more than your vehicle is worth	Extra cost
No deductible	If added to a car loan through a dealer, you could pay loan interest on whatever gap costs

Vehicle Depreciation Could Weigh Into Your Gap Insurance Decision

Gap insurance becomes a better bet if you have a large car loan or you bought a vehicle that quickly depreciates in value. The average car depreciates by 38.8% after five years, according to a study by iSeeCars, which analyzed more than 1.1 million car sales.

But electric vehicles depreciate faster than other vehicle types, losing about half of their value in five years. That may influence the insurance cost of the most and least expensive vehicles to insure.

Top 10 Vehicles With the Highest Depreciation Over Five Years

Certain types of luxury cars depreciate at a much faster rate. For example, the Maserati Quattroporte, BMW 7 and Maserati Ghibli all depreciate by more than 60% over five years.

Vehicle	Average 5-year depreciation
Maserati Quattroporte	64.5%
BMW 7 Series	61.8%
Maserati Ghibli	61.3%
BMW 5 Series (hybrid)	58.8%
Cadillac Escalade ESV	58.5%
BMW X5	58.2%
Infiniti QX80	58.1%
Maserati Levante	57.8%
Jaguar XF	57.6%
Audi A7	57.2%
Source: iSeeCars.com, 2023

Vehicles With the Lowest Depreciation Over Five Years

Vehicles that depreciate the least include the Porsche 911, Porsche 718 Cayman and Toyota Tacoma.

Vehicle	Average 5-year depreciation
Porsche 911 (coupe)	9.3%
Porsche 718 Cayman	17.6%
Toyota Tacoma	20.4%
Jeep Wrangler/Wrangler Unlimited	20.8%
Honda Civic (sedan/hatchback)	21.5%
Subaru BRZ	23.4%
Chevrolet Camaro	24.2%
Toyota C-HR	24.4%
Subaru Crosstrek	24.5%
Toyota Corolla	24.5%
Ford Mustang	24.5%
Source: iSeeCars.com, 2023

Green Vehicle Depreciation Over Five Years

Thinking of going green with an electric or hybrid vehicle? The average depreciation over five years for hybrid vehicles is 37.4% and the average depreciation over five years for electric vehicles is 49.1%

Here’s a look at depreciation over five years for some models of electric and hybrid cars, including the most and least expensive green cars to insure.

Electric Vehicle Depreciation Over Five Years

Electric vehicles have been gaining in popularity, but the category is fairly new overall. These electric vehicles have been in production for at least five years.

Vehicle	Average 5-year depreciation
Tesla Model 3	42.9%
Tesla Model X	49.9%
Nissan LEAF	50.8%
Chevrolet Bolt EV	51.1%
Tesla Model S	55.5%
Source: iSeeCars.com, 2023

Hybrid Vehicles With the Lowest Depreciation Over Five Years

Residual values for hybrid vehicles have increased in the last four years, bringing down the average depreciation from 56.7% to 37.4%. Toyota makes six of the top 10 hybrid vehicles that depreciate the least.

Vehicle	Average 5-year depreciation
Toyota Prius	27.9%
Toyota Prius Prime	28.1%
Toyota RAV Hybrid	29.1%
Toyota Camry Hybrid	35.3%
Honda Accord Hybrid	36.4%
Toyota Highlander Hybrid	36.5%
Hyundai Ioniq Hybrid	37.4%
Kia Niro	37.6%
Toyota Avalon Hybrid	43.0%
Hyundai Sonata Hybrid	43.5%
Source: iSeeCars.com, 2023

How Do Insurance Companies Decide to Total a Car?

Gap insurance will kick in if your car is declared a total loss, but the definition of a “totaled” car varies from state to state. Many states set a percentage of a car’s value as a threshold, and a car is considered totaled if the cost of repairs exceeds that percentage. Repair costs generally include both parts and labor.

Some states specify using NADAguides for determining the value of a vehicle. Other states specify only that vehicle value should come from a current edition of a nationally recognized compilation of values, including databases.

Other states use what’s called a “total loss formula” (TLF). For example, in California the TLF is Cost of Repair + Salvage Value ≥ Actual Cash Value. If the sum of the cost of repair and salvage value is greater than the ACV, then your car is considered a total loss.

Car Totaling Laws by State

State	When is a car totaled?
Alabama	A total loss shall occur when an insurance company or any other person pays or makes other monetary settlement to a person when a vehicle is damaged and the damage to the vehicle is greater than or equal to 75% of the fair retail value of the vehicle prior to damage as set forth in a current edition of a nationally recognized compilation of retail values.
Alaska	Alaska uses a total loss formula that says vehicles are totaled when repair costs exceed the vehicle’s value.
Arizona	Arizona uses a total loss formula that says insurance companies can decide if a vehicle is totaled.
Arkansas	A vehicle is considered totaled when there’s damage in an amount equal to or exceeding 70% of its average retail value.
California	California uses a total loss formula that says a vehicle is totaled when it’s “uneconomical to repair.”
Colorado	Colorado uses 100% of vehicle value as the threshold for totaling. State law says a vehicle is totaled when the “cost of repairing the vehicle to a roadworthy condition and for legal operation on the highways exceeds the vehicle's retail fair market value immediately prior to the damage.”
Connecticut	Connecticut uses a total loss formula. To calculate a vehicle’s value auto insurers must use at least the average of the car’s retail value from (1) NADA or another industry source that has been approved for such use by the state’s insurance commissioner and (2) one other automobile industry source that has been approved.
Delaware	Delaware’s total loss formula says insurance companies can decide when a vehicle is totaled.
District of Columbia	A vehicle is totaled when repairs exceed 75% of the vehicle’s retail value prior to the accident.
Florida	An insurance company can declare a vehicle is a total loss when repairs exceed 80% of its value. State law says a vehicle must be totaled when repairs exceed 100% of value.
Georgia	Georgia uses a total loss formula that says a vehicle is totaled when it is “damaged to the extent that its restoration to an operable condition would require the replacement of two or more major component parts.”
Hawaii	Hawaii’s total loss formula says an auto insurance company can decide if a vehicle is totaled.
Idaho	Idaho uses a total loss formula and gives a vehicle a salvage title if “the cost of parts and labor minus the salvage value makes it uneconomical to repair or rebuild.”
Illinois	Illinois has a total loss formula that says an insurance company can decide a vehicle is a total loss, or when repairs are more than 70% of the vehicle’s fair market value.
Indiana	A car is totaled in Indiana when damage exceeds 70% of its value.
Iowa	A car is totaled in Iowa when damage exceeds 50% of its value.
Kansas	A car is totaled in Kansas when damage exceeds 75% of its value.
Kentucky	A car is totaled in Kentucky when damage exceeds 75% of its retail value from the NADA price guide.
Louisiana	A car is totaled in Louisiana when damage exceeds 75% of its retail value from the NADA price guide.
Maine	Maine uses a total loss formula that says vehicles are totaled when there’s “evidence that a vehicle was declared a total loss by an owner or an insurance company.”
Louisiana	A car is totaled in Louisiana when damage exceeds 75% of its fair market value.
Massachusetts	Under the Massachusetts total loss formula, an auto insurance company decides if a vehicle is totaled.
Michigan	A car is totaled in Michigan when damage exceeds 75% of its pre-damaged actual cash value.
Minnesota	A late-model or high-value car is totaled in Minnesota when damage exceeds 80% of its actual cash value.
Mississippi	Mississippi uses a total loss formula and says insurers can’t total cars that are 10 years old or older, or with a value of $1,500.00 or less, or to vehicles with damage that requires the replacement of five or fewer minor components.
Missouri	A car is totaled in Michigan when damage exceeds 80% of its fair market value and the vehicle is no more than six years old, based on the manufacturer’s model year.
Montana	Montana’s total loss formula says insurers can decide when to total vehicles.
Nebraska	A car is totaled in Nebraska when damage exceeds 75% of its retail value and the vehicle is no more than six years old.
Nevada	A car is totaled in Nevada when damage exceeds 65% of its fair market value.
New Hampshire	A car is totaled in New Hampshire when damage exceeds 75% of its fair market value or that an insurer decides is “physically or economically impractical to repair” for a claim settlement.
New Jersey	New Jersey’s total loss formula says that an insurer can decide that a vehicle is “economically impractical” to repair.
New Mexico	New Mexico’s total loss formula says that an insurer can decide that a vehicle is “uneconomical to repair.”
New York	A car is totaled in New York when damage exceeds 75% of its actual cash value.
North Carolina	A car is totaled in North Carolina when damage exceeds 75% of its fair market value.
North Dakota	A car is totaled in North Dakota when damage exceeds 75% of its fair market value, based on the NADA price guide.
Ohio	Ohio’s total loss formula says that an insurer can decide that a vehicle is “economically impractical” to repair.
Oklahoma	A car is totaled in Oklahoma when damage exceeds 60% of its fair market value.
Oregon	A car is totaled in Oregon when damage exceeds 80% of its retail market value.
Pennsylvania	Pennsylvania’s total loss formula says a vehicle is totaled when “the cost of repairs would exceed the value of the repaired vehicle.”
Rhode Island	Rhode Island’s total loss formula says an auto insurance company can decide when a vehicle is a total loss.
South Carolina	A car is totaled in South Carolina when damage exceeds 75% of its fair market value.
South Dakota	South Dakota’s total loss formula says that an insurer can decide that a vehicle is a total loss, as long as it’s less than 10 model years old.
Tennessee	A car is totaled in Tennessee when damage exceeds 75% of its fair market value.
Texas	A car is totaled in Texas when damage exceeds 100% of its actual cash value.
Utah	Utah’s total loss formula says an insurance company can decide when a car is totaled.
Vermont	Vermont’s total loss formula says an insurance company can decide when a car is totaled.
Virginia	A car is totaled in Virginia when damage exceeds 75% of its actual cash value.
Washington	Washington’s total loss formula says an insurance company can decide when a vehicle is “uneconomical to repair.”
West Virginia	A car is totaled in West Virginia when damage exceeds 75% of its market value.
Wisconsin	A car is totaled in Wisconsin when damage exceeds 70% of its market value.
Wyoming	A car is totaled in Wyoming when damage exceeds 75% of its retail cash value.
Source: Forbes research

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Gap Insurance FAQ

Can I cancel gap insurance?

You can cancel gap insurance by contacting your car insurance company. There may be a cancellation fee, and you should expect a pro-rated refund based on how long you’ve had the gap insurance.

If you bought gap insurance through a car dealership and the cost is rolled into your car loan, you may not be able to cancel it.

Can you get gap insurance after you buy a car?

You can buy gap insurance after you buy a car, but the purchase window will be limited. Often car insurance companies will require that you request gap insurance within 30 days of leasing or financing the vehicle.

Also, your lender will typically require you to buy collision and comprehensive insurance. These coverage types pay for damage to your car. Collision pays for your car damage if you hit another vehicle—regardless of fault—or an object, like a pole. Comprehensive insurance covers theft and non-crash damage like fire and floods.

When does gap insurance not pay?

Insurance companies won’t pay a gap insurance claim if your vehicle is damaged but repairable—it only covers totaled cars. Gap insurance is also only for your vehicle. It won’t pay for damage to other people’s vehicles or property, or pay for injuries. Other portions of a car insurance policy can cover those problems.

How long does gap insurance last?

Gap insurance typically lasts until you drop it. Adding gap coverage will add around $60 a year, on average, to your car insurance cost.

Do you need gap insurance if you have full coverage?

Yes, in some cases you may want gap insurance in addition to full coverage car insurance. If you owe more on your vehicle than it is worth, gap insurance covers the difference if the vehicle is totaled. Additionally, usually lenders and lessors require it.

What is a gap insurance dealer option?

A car dealer may offer gap insurance when you buy a car from a dealership. Dealership gap insurance is usually more expensive than if you purchase it through a car insurance company. To be sure you get the best deal when insuring your newly purchased car, compare car insurance quotes from multiple companies.

What is a gap insurance addendum?

A gap insurance addendum is the addition of gap insurance to an existing car insurance policy. After buying a vehicle and insuring it, it’s smart to review your policy at least once a year upon renewal. That way you can be sure you’re still getting the best car insurance for your needs.