Jessica Sautter is a Content Writer for CarInsuranceCompanies.com with a Bachelor’s Degree from Eastern Michigan University in Elementary Education with a Major in Reading and a Minor in Mathematics.

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Chris Harrigan has an economic degree from Limestone College and an MBA from Clemson University. He previously managed auto insurance claims for Enterprise Rent-A-Car. Currently, he is using his business and insurance expertise to provide insurance data analysis and visualizations to enhance the user experience.

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Reviewed by Chris Harrigan
Former Auto Insurance Claims Manager

UPDATED: Sep 11, 2020

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Key takeaways...

  • GAP insurance is only offered on vehicles that are financed
  • The annual rate for each car depreciates depends on the class of vehicle
  • The rate of a car’s depreciation is often greater in the first two or three years of ownership

Many people are shocked when they come to submit an insurance claim for the theft of their car as most car insurance companies only provide reimbursement for the “Blue Book” value of the vehicle.

Fortunately for the consumer, this is where GAP insurance comes in. Enter your zip code in our FREE tool above to get car insurance quotes today!

Table of Contents

How GAP Insurance Works

GAP car insurance provides coverage for the difference in the amount covered by your standard auto insurance policy and the value of the vehicle.

Many people are shocked when they come to submit an insurance claim for the theft of their car as most car insurance companies only provide reimbursement for the “Blue Book” value of the vehicle.

This may leave you in a position where you owe thousands on a vehicle that is no longer usable.

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Will I still have to pay my deductible in event of a total loss?

Most car insurance companies will deduct your policy deductible from the reimbursement check.

Some providers may offer an option wherein the event of a loss in the deductible will not be included but at the moment this option is few and far between.

How much does a car depreciate in value?

On average, a new car may depreciate as much as 20 percent just when it is driven away from the car showroom.

The annual rate for each car depreciates depends on the class of vehicle.

As a general rule, if you finance a new car with less than 20 percent down you should always get GAP car insurance.

The rate of a car’s depreciation is often greater in the first two or three years of ownership.

In order to estimate the ongoing need for GAP liability insurance, calculate the depreciated value of the vehicle against the amount owed.

Remember, GAP car insurance is covering the difference between what is covered by insurance and the actual value of the vehicle.

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Do I need GAP insurance?

Getting GAP insurance is certainly advisable and may even be necessary to have.

Here are some circumstances where you will need GAP insurance:

  • Paying off your car over a period extending beyond 48 months; those taking a payment plan over 72 months are encouraged to take advantage of GAP insurance. The longer the term of your loan the less principal you pay every month so your total car loan liability is reducing at a lesser rate than the car value.
  • Cars that are noted for depreciating quickly (such as luxury vehicles, or those which have been custom designed and fitted)
  • Acquiring a car loan. Should you decide to attach your outstanding car payments to your new car loan, the value of the car as well as the insured value is vastly different and could place you in a precarious position.
  • A deposit of less than twenty percent produces a circumstance that certainly requires GAP insurance.

All of the above situations place people at an unfair advantage as they are exposed to the risk of paying back hefty car payments on a car they no longer own.

Here are a few facts to help better your understanding of the situation:

  • You buy a car for $20,000 and manage to pay off $3000 over the first year
  • In the second year, the car is valued at $13,000 plus you have a deductible of $1000
  • In the event of a total loss car accident, the driver without GAP car insurance will only be covered to the value of $12,000. However, you still owe the bank a further $4,000 on your car loan!

Leased cars are often covered by GAP insurance as car leasing companies understand how to protect themselves; however check the agreement carefully to make sure you are covered as this is not a general rule.

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Is GAP Car Insurance expensive?

The answer to this depends on a number of factors including the value of the car and the amount owed.

Generally speaking, GAP car insurance coverage is not expensive and may range anywhere from $7 a month to $20 a month.

What types of GAP insurance are available?

When you research GAP liability insurance, you will discover that there are three types of GAP insurance.

Simple GAP insurance is an additional type of car insurance coverage purchased by the consumer and may only be issued by a licensed agent.

It’s important to note some of the biggest car insurance companies may not offer GAP insurance coverage.

The second type of GAP insurance is known as a GAP Waiver. A GAP Waiver is an agreement between the bank or car dealer and you in order waive the difference between the loan owed and the real value of the car.

Lastly, there is an insurance called GAP Endorsement. GAP Endorsement is an amendment to your current car insurance to include the GAP coverage.

GAP insurance is only offered on vehicles that are financed and they must also cover comprehensive insurance and collision insurance.

Once your loan amount is paid off, the policy should be canceled because there is no point to having car insurance for a vehicle you no longer own.

Enter your zip code in our FREE tool below to get car insurance quotes today!

References:

  1. https://www.allstate.com/tools-and-resources/car-insurance/new-used-or-leased.aspx
  2. https://www.nationwide.com/how-does-gap-insurance-work.jsp
  3. https://www.thebalance.com/gap-insurance-requirements-and-your-rights-2645574
  4. https://www.geico.com/information/faq/cancel-insurance/