Inside Story
What is gap insurance and do I need it? | Indiana
Quick answer: Gap insurance (Guaranteed Asset Protection) covers the difference between what your car is worth and what you still owe on your loan or lease if the vehicle is totaled or stolen. If you owe more than your car's current market value, which is common in the first few years of ownership, gap insurance may help prevent you from paying thousands out of pocket for a vehicle you can no longer drive.
Let’s say you buy a car for $30,000. Two years later, it's worth $20,000, but you still owe $25,000 on the loan. Then, someone rear-ends you on I-70 and totals it. A standard auto insurance policy may pay the car's current value: $20,000. That could leave you $5,000 short, still owing the bank for a car that's sitting in a salvage yard.
That $5,000 hole is the "gap." And gap insurance is designed to help fill it.
How gap insurance works
If your car is declared a total loss (meaning the repair cost exceeds the vehicle's actual cash value) or stolen and not recovered, a standard auto insurance policy typically pays out the vehicle's current market value, not what you paid for it or what you still owe on the loan.
Gap insurance can cover the difference between that insurance payout and your remaining loan or lease balance, minus your policy deductible.
Example: How gap insurance pays out
Original purchase price: | $28,000 |
Current loan balance: | $23,500 |
Actual cash value at time of loss: | $18,000 |
The "gap": | $5,500 |
Your deductible: | −$500 |
Gap insurance would pay: | $5,000 |
Without gap insurance, you could owe $5,500 to your lender for a car you can no longer drive.
What gap insurance covers and what it doesn't
Typically covered
The difference between your loan/lease balance and the vehicle's actual cash value after a covered total loss
The same difference if your vehicle is stolen and not recovered
Typically not covered
Your deductible (you still pay this)
Overdue loan payments or late fees
Security deposits or lease penalties
Extended warranties or service contracts rolled into the loan
Carry-over balances from previous loans
Mechanical breakdowns or partial damage, gap typically only applies to a total loss or theft
Do you need gap insurance?
Not everyone does. Here's a quick way to help figure out where you stand:
You may want to consider gap insurance if... |
You owe more on your auto loan than the car is currently worth (negative equity / "upside down") |
You put less than 20% down when you bought the vehicle |
Your loan term is 60 months or longer |
You leased the vehicle (leases often require gap coverage) |
You rolled over a balance from a previous loan into your current one |
Gap insurance may not be necessary if... |
You own your car outright (no loan or lease) |
Your loan balance is less than the car's current value (positive equity) |
You could comfortably cover the gap amount out of pocket if your car were totaled. It may be a few thousand dollars or more depending on your numbers. |
Where to buy gap insurance and what to watch for
Here are a few options to consider:
Through your auto insurance company. At Indiana Farm Bureau Insurance, you can add the Auto Loan/Lease Coverage Endorsement, which is our version of gap coverage, to your auto policy. This is typically added at the time the vehicle is purchased and generally remains on the policy until the loan or lease is paid off.* Contact your local agent to see if you can add it.
Through the car dealership. Dealers often offer gap coverage at the time of purchase. Dealership gap is often more expensive, and the cost may get rolled into your loan, meaning you could pay interest on it. Always compare the dealer's price with what your insurer charges.
Through your lender or credit union. Some financing companies may offer gap as a flat-rate add-on. Pricing and terms vary.
Can you cancel gap insurance?
At Indiana Farm Bureau Insurance, once the Auto Loan/Lease Coverage Endorsement is placed on the policy, it must remain on the policy until there is no longer a lienholder associated with the policy.
Once you pay off your car loan, contact your agent to remove the endorsement and potentially save on your premium.
Your local Indiana Farm Bureau Insurance agent can walk you through the Auto Loan/Lease Coverage Endorsement and help you determine if it may be right for your situation.
Frequently asked questions about gap insurance
What does gap insurance stand for?
GAP stands for Guaranteed Asset Protection. It's an optional coverage that can help pay the difference between what your car is worth and what you still owe on your loan or lease if the vehicle is declared a total loss or stolen.
How much does gap insurance cost?
Gap insurance through an auto insurer is often less expensive than purchasing it at a dealership. The exact cost depends on your vehicle, coverage and insurer. Contact your local Indiana Farm Bureau Insurance agent for a quote. It may cost less than you expect.
Is gap insurance worth it?
If you owe more on your vehicle than it's currently worth, gap insurance is often worth the cost. Without it, a total loss could leave you paying thousands for a car you can no longer drive. If you own your car outright or have significant equity, you may not need it.
Does gap insurance cover my deductible?
No. Gap insurance can cover the difference between your car's actual cash value and your loan balance, but your standard policy deductible still applies to the underlying collision or comprehensive claim.
Can I buy gap insurance after I've already purchased my car?
At Indiana Farm Bureau Insurance, our form of gap coverage, called the Auto Loan/Lease Coverage Endorsement, must be added at the time the vehicle is purchased.* Check with your insurer for their specific requirements.
Do I need gap insurance on a used car?
Possibly. Used cars tend to depreciate more slowly than new ones, but if you financed with a small down payment or a long loan term, you may still be upside down. Calculate the difference between your loan balance and the car's current value to help you decide.
When can I cancel gap insurance?
At Indiana Farm Bureau Insurance, once the Auto Loan/Lease Coverage Endorsement is placed on the policy, it must remain on the policy until there is no longer a lienholder associated with the policy. (Related: “Full coverage” auto insurance: What does it really mean and when do you need it?)
*Conditions and limitations apply, please contact your Indiana Farm Bureau Insurance professional for more information.
Inside Story is for educational and informational purposes only. Inside Story is compiled from various sources, which may or may not be affiliated with our family of companies, and may include the assistance of artificial intelligence. While we strive to provide accurate and reliable content, we make no warranties or guarantees about its completeness, accuracy, or reliability, and are not responsible for the content of any third-party sources or websites referenced herein. The inclusion of any content does not establish a business relationship or constitute our endorsement, approval, or recommendation of any third party. Testimonials and examples provided are for illustrative purposes only and do not guarantee future or similar results or outcomes, and may not consider individual circumstances, goals, needs, or objectives. Inside Story does not provide legal, tax, or accounting advice. For individual guidance, please consult a qualified professional in the appropriate field.
Coverages subject to policy terms, conditions, and exclusions. Subject to underwriting review and approval.
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