GAP Insurance: What It Is and How to Get It

GAP insurance covers the difference between what you owe on a car loan and what you receive from your insurance company for a totaled car. Basically, GAP coverage ensures that drivers don't end up owing money on a vehicle they can't drive. For this reason, GAP insurance is a must-have if you're either leasing or financing a car. Multiple major car insurance companies offer GAP insurance, and it costs an average of $30 a year to add to a policy.

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A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Joel Ohman is the CEO of a private equity backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Jo...

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Reviewed by Joel Ohman
Founder & CFP® Joel Ohman

UPDATED: May 4, 2022

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Here's what you need to know...

  • GAP insurance covers the difference between what you owe on a car loan and what you receive from your insurance company for a totaled car
  • GAP insurance is required when leasing a car. Drivers should have it when financing a vehicle as well to ensure that they don’t end up owing money on a vehicle they can’t drive
  • Multiple major car insurance companies offer GAP insurance. It costs an average of $30 a year to add to a policy

Here’s a nightmare scenario, you’ve just purchased your dream car. It’s beautiful, brand new, and is an absolute joy to drive. You take it out of the dealership lot, and you’re immediately t-boned by a distracted driver. Not the best turn of events, but you weren’t hurt and you have insurance — phew. But wait, you paid $30,000 and your insurance company is only offering you $25,000 for the totaled car. After your deductible, you lost $5,000 and have no car to show for it.

Apparently, as soon as you drove your new car onto the road, its value dropped. And your car insurance pays based on this, meaning less than what you just paid for it.

Situations like the one described above are why GAP insurance exists. GAP insurance (which stands for guaranteed asset protection) covers the difference between what you paid for a car and what it’s actually worth. Basically, if you have a newer car that you’re still making payments on, you want GAP insurance.

We’re here to help you understand your car insurance policy by explaining the ins and outs of GAP insurance. Read on to find out how much GAP insurance costs, where you can obtain it, and how long you should keep it before it stops making financial sense to have it.

Looking for affordable GAP insurance coverage? Enter your ZIP code in our free online tool to compare rates and find coverage that’s right for you.

What is GAP insurance?

Guaranteed asset protection (GAP) insurance is an optional form of car insurance coverage that helps cover the difference between what you owe on a car and its actual value. Generally, you should only purchase GAP insurance if you’re financing a new car. If you’re buying a car with a single payment, GAP insurance won’t help you since you’ll have no loan to pay off. And if you’re purchasing an older car, the amount the GAP insurance pays out may not justify the modest monthly cost.

GAP insurance can be a lifesaver when your car is damaged or stolen while you’re still paying off the loan. This is mainly due to how quickly most cars depreciate in value. Your average new car will drop in value by as much as 20% in the first year alone. So if you take out a loan on a car for $25,000, it will be worth $5,000 less by the end of the year. Since most car insurance companies pay out the actual value of your car if it’s totaled or stolen (and not what you paid for it), you could easily end up owing money on a car you can’t drive — unless you have GAP insurance.

GAP insurance is also required by most leases. Keep in mind that this doesn’t mean that GAP insurance is automatically included in your lease, so you may have to go out of your way to find GAP coverage before leasing a car.

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Where can you buy GAP insurance?

You can either purchase GAP insurance from a car insurance company or from the dealership where you’re leasing or financing your car. Since many major car insurance companies offer GAP insurance, you should contact your current insurance first to find out if it can be added to your policy.

It’s usually a better idea to buy GAP insurance from a car insurance company rather than a dealership. It often costs much more to buy GAP insurance from a dealership because the cost of this coverage is added to your principal loan payment, meaning you end up owing interest on your GAP insurance. This can make it more difficult to pay off your loan. Although it may involve a little more paperwork, it’s worth it to purchase GAP insurance from an insurance company.

If you don’t currently have a car insurance company (or if they don’t offer GAP insurance), take a look at these five companies, which are the largest car insurance companies by market share that offer GAP coverage (or a similar coverage option):

How much does GAP insurance cost?

The cost of GAP insurance depends on where you buy it from. Dealerships tend to offer drivers GAP insurance for a one-time cost of between $200 and $700. Since this amount is added to your principal payment, buying GAP insurance from a dealership adds interest to your car loan.

Buying GAP insurance from a car insurance company is almost always more affordable. GAP insurance costs an average of $30 a year to add to an existing car insurance policy. GAP insurance from a car insurance company also doesn’t come with interest.

Basically, you should try to obtain GAP insurance from a car insurance company instead of from a dealership when possible.

When should you have GAP insurance?

You should have GAP insurance if you’re leasing or financing a newer vehicle. If you still owe a large sum of money on a car, you should have GAP insurance so you can pay your loan in case your car is totaled in an accident. While leases generally require you to purchase GAP insurance, finance agreements may sometimes not. If you don’t know if you have GAP insurance coverage, you should contact your car insurance or the dealership that you got your vehicle from.

According to the Insurance Information Institute, purchasing GAP insurance is also a good idea if you rolled over negative equity from a previous loan to a new car loan.

There are also situations where GAP insurance becomes a financial drain that offers no real benefits. Once your loan balance reaches a point where collision/comprehensive insurance will cover it in full, you should cancel your GAP insurance coverage.

GAP insurance only helps you pay for the difference between what your other coverage pays out and what you owe on a loan. GAP insurance won’t help you cover the cost of an accident once your loan amount drops below the actual value of your car, but it might still show up on your monthly bill.

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What to Remember About GAP insurance

  • GAP insurance (“GAP” stands for guaranteed asset protection) covers the difference between what you owe on a car loan and what you receive from your insurance company for a totaled car.
  • GAP insurance is required when leasing a car. Drivers should have it when financing a vehicle as well to ensure that they don’t end up owing money on a vehicle they can’t drive. Once your remaining car loan drops below the actual value of your car, GAP insurance should be canceled.
  • Multiple major car insurance companies offer GAP insurance, including State Farm, Progressive, Allstate, Liberty Mutual, and Nationwide. It costs an average of $30 a year to add to a policy.

Whether or not you need to obtain GAP insurance, you could lower your rates by comparing coverage options in your area. Looking for the most affordable insurance that meets your needs? Find out how much you could save on insurance by entering your ZIP code in our free online quote tool.

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