A car's value can depreciate by up to 20% in its first year, according to Kelley Blue Book.
If you're leasing or financing a vehicle, you could find yourself in a situation where the balance on your auto loan is more than your insurance company will pay if you have to repair or replace the car.
That's where guaranteed asset protection, or "gap" insurance, comes in: If your car is totaled or stolen, it can prevent you from making payments on a vehicle you no longer have.
Your lease or auto loan may require gap insurance, but you can drop it once you have paid off your loan.
What is gap insurance?
If you're in an accident, you'll typically file an insurance claim to get reimbursed for repairs. But if those repairs amount to 75% or more of the car's actual cash value, the car is typically considered a total loss.
Most policies cover the depreciated value of the vehicle. Sometimes, that's significantly less than the price you paid. Or, if you had a loan or lease on the car, that depreciated value might be less than the balance you still owe.
Without gap insurance, you'd need to cover this amount, even if you don't own the car anymore. With gap insurance, the difference is covered.
Purchasing gap insurance alongside your auto policy is the cheapest way to get coverage. To buy it, you typically need to have a full coverage policy, which is often required by your loan or lease agreement. You'll also need to work with an insurer that offers gap insurance, since not all do.
How much does gap insurance cost?
The cost of gap insurance depends on several factors, including where you purchase the policy. "If you add it on to your existing auto insurance policy, it will be the cheapest," Laura Longero, editor in chief of online marketplace QuinStreet, told CNBC Select by email. "It's the most expensive when you buy it from the dealership."
She estimates that gap insurance through a dealership's financing would cost about $500 to $700 per year. If the price is rolled into your loan, you would also be paying interest on the gap insurance.
Meanwhile, buying it with an auto insurance company typically costs $20 to $40 per year, according to Longero.
Keep in mind that you only need gap insurance while you have a loan or lease, so you can drop it after your loan is paid in full.
If you're leasing your vehicle, read your lease agreement carefully before buying a separate policy — gap insurance may already be included.
Best auto policies with gap insurance
Getting gap insurance through your car insurance company is usually cheaper than going through a lender or dealership. However, not every insurer offers these policies.
Several standout car insurance companies offer this option. Here are our top picks based on price, policy availability and coverage:
Best for affordability: Travelers
- Lower rates
- Discount for hybrids/EVs
- Not available in all states
- Some discounts not available in every state
- Below-average customer satisfaction scores
Travelers is one of our picks for best car insurance companies thanks to its overall low rates. While the average driver with a clean driving record and a good credit score pays $2,697 for overall coverage in the U.S., the same average driver would pay about $2,225 with Travelers, according to Bankrate data. However, it only offers gap insurance for new vehicles.
Best for customer service: Auto-Owners Insurance
- Accident forgiveness is an add-on
- High customer satisfaction scores from J.D. Power
- Covers modified cars and vehicles converted for the disabled
- Only available in 26 states
- Quotes must be obtained through an agent
- Claims must be filed with an agent
Auto-Owners consistently tops J.D Power's U.S. auto insurance surveys, which measure customers' views on price, coverage, staff, ease of doing business and problem resolution. The Michigan-based company also scored an A+ rating from the Better Business Bureau.
Best for used cars: Nationwide
- Available in 46 states and Washington, D.C.
- Lowest average premiums for full coverage
- Quotes available online
- High average premium for minimum coverage
- Lower than average scores from J.D. Power's customer satisfaction survey
Nationwide provides gap coverage for vehicles that are up to six years old, twice the age limit most of its competitors allow.
Best for drivers with a previous accident: Erie Insurance
- Affordable premiums
- High customer satisfaction scores from J.D. Power
- Quotes available online
- Only available in 12 states and Washington, D.C.
- Can't buy a policy online
- Fewer discounts than competitors
Erie has affordable rates, even for those who have a less-than-perfect driving record. However, it operates in 12 states, so check the availability in your region.
Is gap insurance worth it?
If you paid cash for your car or paid off your loan, you don't need gap insurance. It's only a consideration if you're currently leasing or financing a vehicle.
Many lenders require borrowers to have gap insurance. But even if yours doesn't, getting it is a good idea if:
- Your down payment was less than 20%
- The term of your loan is 60 months or longer
- You expect to put a lot of miles on the car
- Your model car is likely to depreciate quickly
- You rolled over negative equity from an old car loan into a new one
You can cancel gap insurance once you pay down your loan balance to the point that it's less than your car's worth, as long as the terms of your lease or loan allow it. And, you can cancel once you've paid off your car loan.
We want to hear your story. Do you have a financial success, goal or stressor you're comfortable sharing with a reporter? Please fill out this quick form.
Gap insurance FAQs
What is the purpose of gap insurance?
Gap insurance can cover the difference between what you owe on a car loan and its depreciated value. Otherwise, if it were totaled or stolen, you'd have to pay the difference out of pocket.
Is gap insurance worth it?
If you had no down payment or your loan term exceeds 48 months, gap insurance is probably worth it because your share of equity in the vehicle may not keep pace with its depreciation.
Can gap insurance be added later?
Many insurers will let you add gap insurance as long as you have a loan or lease, though some may require you to add it within a certain time frame from the purchase.
Is gap insurance required by law?
No state requires drivers to have gap insurance, but you may need it as part of a lease or loan agreement, at least until your balance is less than the car's value.
Is gap insurance the same as loan/lease payoff coverage?
Gap insurance and loan/lease payoff coverage function similarly, but may have different limits. Progressive limits the value of its loan/lease payoff to 25% of your vehicle's value.
Do I need gap insurance for a used car?
Gap insurance makes sense for a used car if you've financed it and the loan exceeds its market value. That could easily be the case on a more recent model or if you didn't make a down payment.
Money matters — so make the most of it. Get expert tips, strategies, news and everything else you need to maximize your money, right to your inbox. Sign up here.
Meet our experts
At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Laura Longero, editor in chief of Carinsurance.com.
Why trust CNBC Select?
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every insurance article is based on rigorous reporting by our team of expert writers and editors. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best car insurance.
Catch up on CNBC Select's in-depth coverage of credit cards, banking and money, and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date.
