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What Does GAP Insurance Cover?

Does GAP insurance help to pay off your car loan? Yes.

Does it pay for a new engine? No.

Sure, it would be nice if GAP insurance covered every single car expense, but it doesn’t work like that.

It does however cover your, uh, rear end if your car is totaled or stolen and you still owe money on your car loan. GAP insurance can make the difference between inconvenience and financial disaster.

Let’s take a closer look at what it does and doesn’t cover.

What Is GAP Insurance?

GAP insurance is optional car insurance that can help pay off your loan if your car is totaled in an accident or stolen and you owe more than the car’s depreciated value. So, if you took out a loan or leased a car, and the car is totaled or stolen before you can pay off the loan, GAP insurance will cover the difference between what you owe on the loan and the car’s resale value.

GAP Insurance Coverage Examples

Here’s how it works. Pretend for a minute that you’re in a (covered) car accident and you’re not at fault. Your car is damaged beyond repair, and you still owe $24,000 on your car loan, but the depreciated value of your fancy new car is only $20,000.

If you have GAP insurance in this situation, it will cover the $4,000 gap between what you owe on your car loan and what your car is worth after you pay your deductible.

Let’s look at another example. Suppose you sideswiped a fence causing major damage to your leased car. The car is totaled so you make a claim on your collision insurance. Your insurance company agrees to pay you the depreciated value of the car ($18,000) minus your $1,000 deductible.

But wait. What about the money you still owe on the lease? You’ve only paid six months of the lease so far, and you still owe $22,000. This is when GAP insurance can be a lifesaver. It will pay for the difference between the amount you get for your destroyed car and your lease balance. So, instead of getting a check from your insurance company for $17,000 ($18,000 minus the $1000 deductible), you’ll get $22,000 so you can pay off your lease.

Now that you know what GAP insurance does cover, let’s dive into what it doesn’t cover.

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What GAP Insurance Doesn’t Cover

Wouldn’t it be convenient if you could just pay a minimal monthly fee for GAP insurance, and it rescued you financially every time you had car trouble? It’s a nice dream, but . . . uh, no.

To drive home our point, we put together a list of situations where GAP insurance won’t bail you out.

  • Couldn’t pay your car payment last month? We feel you, but sorry, GAP insurance can’t help here.
  • Your “change oil” light has been blinking forever, you’ve been ignoring it, and now you can see smoke coming from under the hood. GAP insurance won’t pay for the new engine you now need.
  • Haven’t paid your monthly car lease bill for six months and the car was repossessed? You’re on your own here—GAP insurance won’t help.
  • Need a rental car while yours is in the shop? Bummer, but you’ll have to pay for it out-of-pocket (unless you have rental car reimbursement—a type of insurance we don’t recommend).
  • You got in an accident and now your car is missing the front bumper and has a dented front grill. GAP insurance won’t help here because the car is still drivable. Even though it’s now only worth $18,000, compared to the $23,000 it was worth before you mangled the front end, that $5,000 oops is on you.
  • Got your eyes on a shiny new sedan to replace your beater? Don’t count on GAP insurance to come up with the down payment.
  • If you actually believed the car salesman when he sold you an extended warranty, you’ll have to pay interest on that warranty when it’s added to your car loan. GAP insurance can’t help here.

In short, GAP insurance coverage is a great way to protect your money if your car is ever totaled or stolen and you still owe money on your loan. But it won’t help you pay for all car-related mistakes.

FAQs - GAP Insurance Coverage

Got lingering questions? Most readers do. We put together answers to unique questions about GAP insurance coverage.

1. Does GAP insurance cover negative equity?

Yes. Negative equity (aka an upside-down loan) is another term for the gap between what you owe on your auto loan and the car’s actual value. GAP insurance covers the difference between the two.

2. Does GAP insurance cover death?

No. GAP insurance can only be used for losses related to cars. It does not cover bodily injuries, lost wages, medical expenses or funeral costs.

3. What does GAP insurance cover on a leased car?

GAP insurance works much the same way on a leased car as it does on a car that carries a loan. GAP coverage for a leased car is a signed agreement from the insurance company to cover your gap amount if your car is totaled or stolen. In fact, most car dealerships require GAP insurance before they’ll agree to lease a car.

4. Does GAP insurance cover deductible costs?

No. GAP coverage doesn’t pay your deductible. So, if your deductible is $1,000 and the GAP reimbursement amount is $10,000, your total reimbursement amount would be $9,000.

5. Does GAP insurance cover engine failure?

No. You can only use GAP insurance if your car is totaled or stolen. You can’t use it for mechanical repairs.

6. Does GAP insurance cover theft?

Yes. Car GAP insurance covers theft. Most insurance companies require a 30-day waiting period just in case your car is recovered. After the waiting period, your insurance provider will need a copy of the police report before they agree to pay the claim.

7. Should I get GAP insurance?

If you financed your car and your loan amount is more than the car's depreciated value, yes, we recommend buying GAP insurance (but we never recommend taking out a car loan). It’s typically cheaper to buy it from an insurance agent than from a car dealership.

Get the Best GAP Insurance Coverage

If you still have questions about GAP insurance coverage, we recommend contacting one of our Endorsed Local Providers (ELPs).


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Not only will one of our independent ELP experts be able to answer your questions about GAP insurance coverage in your area, but they can also shop around for the best price for you.

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