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We all love the smell of new when we buy a new car, so we ask for a loan for this new car. However, will our comprehensive coverage cover our car? What happens if our car is totaled when we step out the dealership? Should we add Gap coverage on our pilcy? In this article, we will discuss what gap insurance is, how it works, and whether or not you need it.

Gap Insurance will help you cover what you owe to the lender incase your car is totaled or stolen

What is Gap Insurance?

Gap insurance, also known as guaranteed asset protection insurance, is a coverage option that will pay the difference between what you owe to the loan or lease and your vehicle’s actual cash value (ACV), up to the limit of your policy in case your car is stolen or totaled.

How Does Gap Insurance Work?

To answer this question, we should use an example:

Imagine you asked for a loan to buy a car that costs $30,000, so you owe $28,000 in your car loan. Let’s say you exit from your dealership with your new car and suddenly, a fast car impacts on your car and completly destroys your car. Your car insrer’s adjusters declares your car totaled because the repair costs are worth $24,000. As your car was already out of the dealership, the actual cash value of your car is $28,500. so your car insurance pays you the limit of your policy, that tends to be $25,000. So the dilemma goes this way: your car insurer gave you $25,000 to buy a new car, however, you still own $28,000 to your lender, in that case Gap insurance would cover the rest of money needed to cover your loan, that in this example is $3,000.

Who Needs Gap Insurance?

Gap insurance is especially important for those who:

  • Put little or no money down when purchasing a car

  • Finance a car for a long period of time (more than 60 months)

  • Buy a car that depreciates quickly

  • Drive more than the average person

  • Have a high-interest car loan

If you think one of these factors would fit one of your real life scenarios, you will need Gap Insurance. Remember, if you ask for a loan to buy a new car, lenders will always request you to add comprehensive and collision coverage in your policy.

How Much Does Gap Insurance Cost?

On average, Gap insurance costs $60 per year, so that will be added to your premium as an extra. The car insurer with the cheapest gap insurance is Travelers that costs around $35 per year, and the most expensive is Eire that costs $60.

How to Purchase Gap Insurance

The cheapest way to obtain gap insurance is through a car insurer rather than dealership, because Gap Insurance from dealerships charge you up to $600 on Gap Insurance. The best way to purchase Gap Insurance is by contacting to some car insurers that offer Gap Insurance. You can choose between Trevelers, Progreesive, Auto-Owners Insurance, American Family, State Auto or Eire. Once you choose one of them, you only have to contact to one of their agents, or go directly to their website, fullfil several questions they will ask for, and buy it.

Benefits of Gap Insurance

The benefits of gap insurance include:

  • It will cover the gap you owe to your lender when you owe more than what your car’s acv is worth.

  • There is no deductible to add for this coveage option

Downsides of Gap Insurance

  • Adds an extra cost to your car loan or car insurance policy

  • If you added gap Insurance throught your dealership, you will pay way more than through a car insurer.

Alternatives to Gap Insurance

Some car insurers offer a coverage option named “New Car Replacement Coverage”. This coverage will reimburse you enough money to buy a new car if that is stolen or totaled. However, there is also a deductible added to the amount of money you will recive for your totaled vehicle.

Keep in mind that your car must meet some mileage requirements to be quailified for this coverage option. Some car insurers that offer new car replacement coverage are Farmers, Nationwide or Amica.

What Happens if You Don't Have Gap Insurance?

If you don't have gap insurance and your car is totaled or stolen, you will be responsible for paying the remaining balance on your car loan out of pocket. So the worse part of all of this is you will still have to pay what you owe without any help.

How to Cancel Gap Insurance

If you already paid your loan, and you want to cancel your gap insurance, you can contact to your car insurer agent or thought your car insurance’s website and cancel it. Remmeber you can request a refund for any unused portion of your Gap Insurance. Let’s say you paid 1 full year and you only used 6 months, then your car insurer must reimburse you the remaining 6 months.

Your car insurer will request you some documents like your car has been sold, traded, or paid off. They may also request your car’s current mileage. So please provide it to them to cancel your gap insurance.


Gap insurance is something you must consider to add when the loan of your car is quite extended, and it will protect you from the money you owe to your lender in case your car is stolen or totaled. It’s important you consider adding Gap Insurance for your car because lenders will request you only to add comprehensive coverage along with collision coverage. This coverage option will cost you from $35 to $60 per year only if you buy it through car insurers, if you buy it through dealerships it will cost you around $600 annually.


Q: Can you buy gap insurance after you purchase a car?

A: Yes, you can buy gap insurance after you purchase a car. However, it's usually more expensive to buy gap insurance from a car dealer after you've already purchased the car.

Q: How long does gap insurance last?

A: Gap insurance usually lasts for the duration of your car loan. However, some insurance companies may offer gap insurance for a shorter period of time.

Q: Is gap insurance worth it?

A: That depends on your personal situation. If you have to pay a loan for more than 60 months or the actual cash value of your car will significantly drop in a short period of time, you should add it to your policy. However, if almost paid your loan or the actual cash value of your car is too low, you should not add Gap Insurance.

Other readers were also interested in the following posts:

How to Calculate Total Loss Value on a Car Insurance Claim?

How can you file a GAP insurance claim by yourself?

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