Last Updated August 2024

Gap insurance is an optional coverage that helps pay off your car loan or lease if your car is totaled in an accident or stolen and you owe more than its current value. Gap insurance is only available to drivers with collision and comprehensive coverages. 

Sometimes coverages that provide this protection are called different names, such as residual debt coverage or loan/lease coverage, and they can help you cover the difference — the gap — between what your standard car insurance typically covers (your car’s depreciated worth) and the amount remaining on your loan or lease. For example, Farmers residual debt coverage covers the difference between the amount you owe on your car and its depreciated value, in the event of a total loss, up to a maximum of 25% of that depreciated value. 

How does gap insurance work?

As soon as you drive a new car off the dealer’s lot, it starts to lose value — an average of 20% in the first year, according to the Insurance Information Institute. If you have a car loan or lease, gap insurance can save you from losing money because of that depreciation. 

For example: You buy a new hybrid for $35,000. You put $5,000 down and take out a 60-month loan for $30,000. Two years later, your car is damaged and declared a total loss. Your collision or comprehensive coverages typically only cover up to your car’s actual value — what it’s worth after being driven for two years. 

Each insurer will calculate the actual value of a vehicle based on certain factors, but let’s say it’s valued at $21,000 and you still owe $25,000 on the loan. That $4,000 difference is the amount you would need to pay your lender to close out your loan, unless you have additional coverage. Gap insurance can pay the difference, after taking out your deductible. 

Do I need gap insurance?

Any time you take out a loan to buy a new car, or sign a contract to lease one, there’s likely to be a gap between your car’s value and your loan/lease amount — at least for the first few years you drive the car. Note that many car leases have some type of residual debt “gap” coverage included. You should confirm the terms of your lease before purchasing gap insurance.

Gap insurance can be helpful if your car is totaled and:

• You owe more on your loan or lease than the car is worth.

• You’ve made a small down payment on a new car. A down payment of less than 20%, along with average depreciation of 20% a year, means your car will be worth less than you paid almost as soon as you drive it off the lot. That’s called negative equity. 

• You’ve taken out a long-term loan. When you have a loan with a long payback term, your initial payments go mainly toward interest. Your equity won’t grow as fast as your car depreciates until well into the loan period. 

• Your car depreciates faster than average. This can be true of some sports or luxury cars or cars that exceed the average annual mileage (currently around 14,000 miles a year, according to the Federal Highway Administration).

• Your leasing agency requires you to have gap insurance. Often, it’s included automatically in your lease. Check your lease for this information.

Eventually, as you pay down your loan and build equity in your car, the gap narrows and disappears, and you won’t need gap insurance anymore.

What does gap insurance cover?

Gap insurance covers situations where your car is declared a total loss by your insurance company. This generally occurs:

• When your car has sustained so much damage that repairs would cost more than the car is worth.

• When your car has been stolen and either never found or seriously damaged. 

Having gap coverage means you won’t have to keep making payments on it, beyond your deductible, if it’s totaled.

What doesn’t gap insurance cover?

Gap insurance typically does not cover: 

• Cars sidelined by mechanical problems (such as a blown engine)
• Repairs to a damaged vehicle if it’s not considered a total loss
• Injuries to others
• Damage to someone else’s property

Can gap insurance help me buy a new car?

No, gap insurance won’t give you any money toward a new car. It simply helps to pay off your existing loan/lease. Some insurers also offer new car replacement insurance, which can help you purchase a new car under certain circumstances. Insurers can combine gap insurance and new car replacement coverage together in a policy for a new car. 

Is gap insurance worth it?

If you’re taking out a loan or lease for a new car, gap insurance may be worth it depending on how much the car is worth compared to how much you will owe, and your willingness to pay an out-of-pocket amount if your car is worth less than your remaining lease/loan amount. Remember, gap insurance is typically an option only when you’re buying or leasing a new vehicle.

How much is gap insurance?

The usual factors that typically affect car insurance costs — your age, driving record, where you live and your car’s actual value — can also factor into the cost of gap insurance.  Insurers often combine gap insurance with collision, comprehensive and other coverage types in your car insurance policy, which adds only about $20 a year to your annual premium, according to the Insurance Information Institute.

The information contained in this page is provided for general informational purposes only. The information is provided by Farmers^® and while we endeavor to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to this article or the information, products, services or related graphics, if any, contained in this article for any purpose. The information is not meant as professional or expert advice, and any reliance you place on such information is therefore strictly at your own risk.

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