FinanceGap Insurance Cover in the United States–All You Need To Know

Gap Insurance Cover in the United States–All You Need To Know

Do you need gap insurance cover for your vehicles and other equipment which you acquired through loan or lease?

You need gap insurance cover only when the amount of your actual cash value (ACV) payouts is less than what you owe on your loan or lease.

The deficit from this financial transaction is the ‘gap’ you are left to pay. And you may need insurance cover to bridge this gap.

This article will show you all necessary information about gap insurance.

What Is Gap Insurance?

Gap insurance is a type of automobile insurance coverage that covers the difference between what you owe on your vehicle and its actual cash value if it is damaged or stolen.

Gap Insurance
Image source: Ramsey Solutions

It is a voluntary coverage which you may buy only when you have leased or financed your vehicle purchase through loan.

If your insurer totals your vehicle by policy of damage which includes an accident, theft and fire, the insurer will pay you the actual cash value for your car, if you have comprehensive and collision coverage.

This amount is often considerably less than the amount you still owe on your loan or the amount due for a lease payoff.

Gap insurance means your insurance provider may pay the amount you currently owe as loan on your car at the time of a covered accident, minus your deductible.

Gap insurance lasts for three years. It is designed for car financing transaction by paying out the difference between the amounts you receive from your car insurance provider and the amount it costs to replace your car upon damage.

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What is Stand-Alone Gap Insurance?

Stand-alone gap insurance is a separate policy that depends on your existing car insurance policy. Generally, gap insurance is added to your standard coverage but some companies still sell stand-alone gap policies.

Stand-alone policies may cap the amount they pay out, and may be sold for just a two-year or three-year term. If you buy stand-alone policy, you need to check the particulars because it may be more expensive and may have limitations on what it pays out.

What Does Gap Insurance Cover?

Gap insurance covers the difference between the actual cash value of your vehicle and the current outstanding balance on your loan or lease.

Gap insurance will also pay your regular insurance deductible. Vehicle owners often assume that if their vehicle is damaged or stolen, it will be replaced at the amount they paid, or at least the amount they owe but his is not correct.

Many car insurance companies offer gap insurance or loan/lease payoff insurance as an optional coverage in order to deal with vehicles obtained by owners through loan or lease.

How Does Gap Insurance Work?

If your vehicle is stolen and it was financed and you have a gap insurance cover, then, below illustration shows how it works:

Given that you buy at $30,000 and drove the car for some time. You made an initial deposit of $5000 and now you owe $25,000 in car payments over five years with 0% interest loan at $500 car payment instalment.

You purchased comprehensive and collisions cover with $1000 deductible to protect you against any damages and loss to the vehicle.

Then, you have an accident while still owing heavily on your loan or lease and your vehicle was damaged.

The insurance company, therefore, calculates the actual cash value (ACV) of the car as $23,000, but at the time of the loss you still owe $24,000.

Gap insurance pays the difference between what is owed and what the physical damage insurance company pays plus the deductible.

That is, $24,000 – $23,000 + $1000 = $2,000.

Why Do You Need Gap Insurance?

You need gap insurance cover in order to take into account the depreciation that takes place as you continuously use your car. As you drive a new car its value depreciates and after sometime may be worth 5% less than what you paid at initial purchase.

According to Carfax statistics on current depreciation rates, the value of a new vehicle can drop by more than 20% after the first 12 months of ownership.


Then, for the next four years, you can expect your car to lose roughly 10% of its value annually. This means that a new car can be worth as little as 40% of its original purchase price after five years.

That means the payouts you would get for the value of the car is likely to be much less than what you owe for at least in several years.

What is Gap Insurance Waiver?

On a leased car, the cost of gap insurance or waiver is generally rolled into the lease payments. 

A gap insurance waiver is an agreement under which the creditor agrees to waive the lessee or debtor’s obligation for the difference between the gap-amount and the ACV of the property.

How to get Gap Insurance for Cars?

You need to have a standard auto insurance policy to get this coverage. Gap insurance can only become effective when you carry physical damage coverage of comprehensive and collision on your car in addition to your state’s required minimum liability insurance obligation.

A number of big insurance companies do sell gap insurance as an endorsement or add-on coverage to your vehicle’s insurance policy.

This full coverage of liability and physical damage coverage is usually required by the bank or your creditor where your loan is being sourced.

Therefore, you can buy gap insurance for cars from the following agencies:

  • Your car insurance company
  • From a company that specializes in stand-alone gap insurance policies
  • The bank or financial institution that loaned you the money to buy the car
  • The dealership where you bought the car

Where you can Get Gap Insurance

Gap insurance helps reduce the risk of crippling loss in the event of car accident or theft.

  • Buying Gap Insurance from Your Insurance Company

Find out the company that provides your current automobile insurance policy and check if it offers gap insurance.

It can be easier to work with one company for all your auto insurance coverage needs but not all insurance companies offer gap insurance.

  • Buying Gap Insurance Online

You can get gap insurance online as many providers list their gap insurance offerings online.

Some of the well-known companies that offer gap insurance online include:

  1. Auto-Owners
  2. Chubb
  3. CSAA Insurance Group
  4. Esurance
  5. Liberty Mutual
  6. Progressive
  7. Safeco
  8. State Farm
  9. Travelers
  10. USAA
  11. Nationwide
  12. AAA
  13. AIG
  14. Allstate
  15. American Family

Although, details and availability may depend on your state but you need to compare them to find the platform that suits your insurance target.

  • Buying Gap Insurance from the Dealership

Dealers through whom you bought vehicle would normally suggest that you buy gap insurance from them and may give some reasons bothering on convenience.

Just as you make comparison and research before buying any insurance, you need to look for the best dealer around to make sure you are getting the best price and coverage that suits your financial target.

Is gap insurance necessary & required by law?

Gap insurance coverage is an optional coverage or it is discretionary because the law does not make mandatory.

However, it is normal for lease contracts to factor-in gap insurance in the agreement. This is often referred to as auto loan/lease coverage or loan/lease payoff coverage but it is a matter of convenience.

While you need gap insurance if you owe more on a vehicle than its value, gap insurance coverage is not a legal duty in any state of the US as part of your car insurance policy.

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However, we notice that the California Car Buyer’s Bill of Rights requires disclosure of the price of items commonly packed into loans, such as theft etching on windows and other car parts, gap insurance or extended service contracts. This does not make gap insurance a legal duty on the citizens.

Finally, gap insurance is not a type of insurance required by law to show financial duty to the state when you are going to register or renew registration of your vehicle.


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