What Is Gap Insurance and Is Coverage Worth It? (2022)

If your financed car is totaled, gap insurance can cover the remaining amount on your loan should you owe more than the car is worth.

Gap insurance comes into play if your vehicle is financed and you make a total loss claim — either after your vehicle is totaled (the cost of the repairs would be more than the car is worth) or if it is stolen. When you submit a total loss claim, your insurer will pay a maximum of the actual cash value of your vehicle (ACV).

In some cases, the amount you still owe in car payments can exceed your car’s ACV. This is known as having negative equity or being upside down on your loan. Gap insurance, also sometimes called loan/lease payoff insurance, helps you pay off the loan in this situation. Remember, the loan doesn’t go away just because your car is totaled.

How Does Gap Insurance Work?

Consider the following example: Your vehicle is financed and you still owe $10,000 to your lender. You are involved in an accident, and the car is declared a total loss. The insurance claims adjuster determines that your car’s ACV is $8,000, and your insurer issues a check for this amount. Gap insurance covers the remaining $2,000 to pay off your auto loan balance.

As soon as you drive a new car off the lot, its value starts depreciating. If your new car is totaled within the first few years, you could owe the bank more than what your car is worth. Guaranteed asset protection, or “gap” insurance, covers this difference.