GAP Insurance Coverage: An Expert Guide (2024)

Loan or lease payoff coverage, also called GAP insurance, is a special type of insurance coverage that can be purchased for leased and financed vehicles.  This type of insurance is used to pay the gap between what a car is worth and what you may owe on it in the event of a total loss.  Depending on your situation, GAP insurance may be a requirement from your lien holder or leasing agency, or it may be an optional coverage.  Either way, GAP insurance can be extremely valuable and protect you from financial hardship and unwanted surprises down the line.

Why You Need Loan Payoff Coverage

When you purchase a vehicle, that vehicle begins depreciating in value as soon as you drive it off the lot.  A car loan cannot keep up with the rate of depreciation on a brand new vehicle.  This means that you will almost always owe more on your vehicle than the car is actually worth in the beginning.  If you attempted to re-sell the vehicle, for example, you might not be able to get enough for the car to pay off your loan balance, especially if you sell the car shortly after buying it.

The same is true of vehicles that are totaled in car accidents. A vehicle is deemed to be a total loss any time it is not economically or physically feasible to repair a vehicle. (For more information, read our “What should I do if my vehicle is deemed a total loss?“).  

 A newer model car could be totaled by engine or transmission damage, fire damage, frame damage or body damage to multiple panels.  In some cases, airbag deployment is enough to render a vehicle totaled as the airbags can be very pricey to replace.

Once a car is declared a total loss, your insurance company will determine its actual cash value and offer a settlement based on that figure less any deductible you may owe.  If you are making lease payments on the vehicle, the lien holder or leasing agency is the legal owner of the car; this means that they will be paid off first.  After the insurance company has satisfied the lien from any auto loans, you would receive any overage.

Read more: Best Car Insurance for a Leased Vehicle

If, however, you owe more on the vehicle than it was worth, you will find yourself continuing to owe the loan company for a vehicle you no longer own.  In order to avoid the uncomfortable position of making payments on a vehicle that’s been totaled, you can purchase GAP insurance coverage.

Where to Buy GAP Insurance

Most lending institutions offer loan lease payoff or GAP insurance as part of the terms of the loan or lease.  This insurance is underwritten by the lending agency, and the expense is added on to the other costs of the loan.  You pay for the GAP coverage as part of your car payment.  For this reason, many people don’t realize that they already carry GAP insurance.  Be sure to check your statement to see if it’s included or contact your lender to confirm before buying additional coverage.

If you do not already have loan payoff insurance through the lending agency, you can usually purchase it through your private auto insurer.  Although these coverages are not always widely advertised by insurers, they’re usually available if you ask.  In most cases, the monthly fee to add this coverage to your policy is quite affordable and definitely worthwhile.  A few extra dollars a month is far superior to being stuck with a car payment for a totaled vehicle in the event of a major accident.

Case Studies: Fictional Scenarios Illustrating the Value of GAP Insurance

Case Study 1: Sara’s Total Loss

Sara bought a new car but had an accident a few months later, which resulted in her car being declared a total loss. Her insurance payout was much less than her car loan balance, leaving her with a large debt for a car she no longer had.

Case Study 2: John’s Leased Vehicle

John leased a car for three years, but it was stolen and never found after just one year. Since John didn’t have GAP insurance, he had to pay the remaining lease payments and fees for a car he no longer possessed. GAP insurance would have covered the remaining lease balance and spared him the financial burden.

Case Study 3: Lisa’s Unexpected Total Loss

Lisa had been paying off her used car loan for years when she had a major accident that rendered her car irreparable. While her insurance paid out a settlement based on the car’s value, it wasn’t enough to cover the remaining loan balance. Without GAP insurance, Lisa still owed a significant amount for a car she couldn’t drive. If she had GAP insurance, she would have been protected from this financial hardship.