Gap Insurance—What It Is and How It Works

November 2, 2018

So what is gap insurance?

Gap insurance is helpful in the event that your car gets stolen or totaled. Gap insurance may be something to consider if your car is worth less than what you owe on your loan. If your car is worth $10,000 but the loan amount is $15,000, then gap insurance coverage will pay off the remaining gap in your loan ($5,000 in this example).

How does it work?

Over time your car's value can depreciate. Gap insurance can help protect you against this depreciation, especially when your loan amount is larger than the actual value of the car.

Example

You buy a new car and finance $25,000 for the loan. You make your loan payments and after a few years your car is worth $15,000 but you still owe $20,000 on the loan. That is a $5,000 gap. If you total the car, gap insurance will pay you $20,000 (the loan amount). Without gap insurance, you would only get $15,000 from your insurance.

Its important to remember that you will likely need both comprehensive and collision coverage to qualify for gap insurance.