Guaranteed Asset Protection (GAP) insurance is a type of optional coverage you can add on to your existing auto insurance policy to cover the difference between your car’s depreciated value and how much you owe on your auto loan or car lease in the event that your car is totaled or stolen.
How does gap insurance work?
Gap insurance covers the difference between the depreciated value of your car and how much you owe on a loan at the time of an accident. Your car starts to lose value as soon as you drive it off the lot. Most cars depreciate by about 30% within the first two years and continue to depreciate by up to 12% every year after that.
If you’ve taken out a car loan, that means you could end up owing more money than your car is worth in the event of a total loss.
"If your car is totaled or stolen and not recovered, the average auto policy will typically only pay out the actual cash value of the vehicle—not what you still owe on it,” says Matt Cavanaugh, Associate Vice President of Auto Product Development at Grange Insurance.
For example, let’s say you buy a new car and owe $28,000 on your loan. You get into an accident and the car is totaled. Your insurance will cover the depreciated value of the car, which is roughly $23,000—meaning you’re still responsible for $5,000 in loan payments on a car you can’t drive.
Gap coverage protects you by covering the “gap” amount between what your base auto insurance policy covers and what you still owe on your loan if you owe more than what the car is worth—potentially saving you thousands of dollars in out-of-pocket costs.
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What does gap insurance cover?
Gap insurance coverage eliminates leftover debt on a car loan or lease when you owe more than the value of the totaled or stolen vehicle.
Auto policies with gap insurance provide additional coverage for total loss events such as:
- Accidents
- Car theft
- Natural disasters (if covered by your comprehensive/collision policy)
Do I need gap insurance if I have full coverage?
Full coverage typically means a combination of liability insurance, comprehensive coverage, and collision coverage. Full coverage policies cover damage to others, damage to your own car, and in some cases, non-collision events like theft or natural disasters.
While full coverage is a requirement when you buy a car, it won’t pay for the difference between what you owe on the car and its actual cash value if it’s totaled or stolen.
"For leased vehicles, gap coverage is often essential, and in most cases, you’re required to have it as part of your lease agreement,” Cavanaugh says.
You should also consider gap insurance if:
- You’ve made a low down payment or no down payment
- Your loan term is 60+ months
- Your vehicle is rapidly depreciating, as most do early on
How much does gap insurance cost?
As with other auto policies, the cost of gap coverage can vary based on things like your age, driving record, where you live, and type of vehicle.
Car dealerships may offer gap insurance as part of the lease or loan agreement, though this tends to be expensive, sometimes costing up to $500 or more.
It can be more cost-effective to buy gap coverage through your insurer. Most insurance companies offer gap coverage as an add-on to an existing auto policy, with an average cost between $40-$60 per year.
Questions? Your agent can help
If you loan or lease your vehicle—or if you’re planning to lease or finance a new car—it’s probably a smart idea to look at gap coverage.
The first step: talk to your independent insurance agent. They can explain your auto policy’s coverage limits and requirements and help you make smart decisions when it comes to gap insurance.
References
-Kelley Blue Book
-Department of Financial Services
-Insurance Information Institute
-Investopedia
Coverages described herein may not be available in all states. Please contact a local independent Grange agent for complete details on coverages and discounts. If the policy coverage descriptions herein conflict with the language in the policy, the language in the policy applies. The material provided above is for informational, educational, or suggestion purposes and does not imply coverage. WE RESERVE THE RIGHT TO REFUSE TO QUOTE ANY INDIVIDUAL PREMIUM RATE FOR THE INSURANCE HEREIN ADVERTISED. Grange Insurance policies are underwritten by Grange Insurance Company, Trustgard Insurance Company, Grange Indemnity Insurance Company, Grange Insurance Company of Michigan and Grange Property & Casualty Insurance Company*. Not all companies are licensed in all states. *Not licensed in Pennsylvania.