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What does gap insurance do?

Gap insurance coverage protects you if your car is totaled out (or stolen) and you owe more than it’s worth to your lienholder. 

Gap insurance will pay the difference between the actual cash value of your car at the time of the loss, less the applicable deductible (and the vehicle's salvage value if retained by the owner or insured), and any greater amount owed on the vehicle to a lienholder at the time of loss. 

To buy this coverage, you must have collision coverage and comprehensive coverage as part of your car insurance policy.  The actual cash value of your vehicle needs to be paid out by an insurer in order for your gap coverage to pay out (to your lienholder) the remaining amount due on your financed vehicle.

Gap insurance doesn’t cover any unpaid finance charges, excess mileage or wear and tear charges, any other charges or miscellaneous expenses associated with the loan or lease. 

It is also referred to as Guaranteed Auto Protection, Guaranteed Asset Protection, GAP, Loan/lease gap (LLG) or Loan/Lease Payoff. 

Is gap insurance mandatory?

It is an optional coverage.  Neither gap insurance nor loan/lease payoff is required by any state, but if you have a loan or lease on your vehicle, then your financing institution may require that  you carry this coverage (especially for leased vehicles).

Where should I buy a gap policy?

Gap insurance can be purchased from dealerships, financing institutions, some car insurance companies and stand-alone gap insurance providers.  Usually it is cheapest if obtained through a car insurance company, so if your car insurance provider doesn’t offer it see if your state’s insurance regulator has a list of companies that are authorized to sell gap  insurance.

What happens if I don’t have gap insurance?

If you owe more than your financed vehicle’s actual cash value, then you will be left personally responsible for the difference if your car is in a total loss situation without gap insurance coverage.

If your car isn’t financed or you owe your lienholder less than the value of your vehicle, then gap insurance coverage isn’t necessary.