What Is Gap Insurance?

Lorne Daniels | February 13th, 2020

There are lots of different types of car insurance; some are more complete and comprehensive while others are more specialized or niche. Gap insurance is the latter type. Let’s go over what exactly gap insurance is and why you may need it in your insurance policy.

What Does Gap Insurance Do?

Most people lease or finance new cars rather than pay for them upfront. This usually comes with the requirement that the car purchaser has collision and/or comprehensive coverage for the auto insurance policy until the car is totally paid off.

Gap insurance is designed to be used in combination with both of these cover types. In brief, collision and comprehensive coverage help you pay for collision damage or totaled vehicles in the event of a catastrophic accident. More specifically, comprehensive insurance covers the value of your car at the time of the accident… but this can often be significantly less than what the loan of the car currently has remaining. This is because cars are considered to be less valuable the moment they are driven off the lot.

That’s where gap insurance comes in. It covers the remaining loan amount after the comprehensive coverage pays for the depreciated amount of the totaled car. For instance, if your car loan was for $50,000, but you wrecked it when its depreciated value was only $40,000, your comprehensive insurance would only cover $40,000. Gap insurance will cover the remaining $10,000, whereas you would otherwise have to pay that 10 grand out-of-pocket.

When is Gap Insurance a Good Idea?

In general, gap insurance is a good idea sometime after you’ve purchased a car and before you paid off the majority of the loan. If you get a new car into a wreck a few days after purchasing it, its depreciated value will likely not be much lower than the total loan amount. So gap insurance may not be worthwhile. On the flip side, if you have almost paid off your entire car loan and end up wrecking it, your remaining value may not be very much at all.

In the middle of your loaning period, when you still have several years to go to pay off the car and its value has significantly depreciated, gap insurance is particularly valuable. However, many insurance companies allow you to combine gap insurance with other insurance packages for a lower rate than if you purchase them separately.

As such, many people who buy brand-new cars get gap insurance just in case, especially if they know they’ll be paying the car off for many years to come.

Where Does Gap Insurance Apply?

Gap insurance applies:

When Can You Buy Gap Insurance?

Some car insurance companies and require that your vehicle has to be brand-new in order to provide you with gap insurance. However, the specific definition of brand-new can vary dramatically from company to company; some consider brand-new to be within one or two years of the sale.

Other companies allow you to add on gap insurance at any point in your coverage plans, though this is less common.


Overall, gap insurance can be an extremely valuable investment for many car owners and especially those purchasing new vehicles. Talk to your insurance agent or provider to find out if they offer gap insurance and whether it might be a good choice for your next car purchase. You may even be able to get a package deal and discount. Good luck!

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