Glossary: Guaranteed Asset Protection (GAP) Insurance

Read time: 2 minutes 

Ever heard of GAP insurance? Take a break with some easy reading to learn more about this essential coverage for anyone in a lease or loan.

Table of Contents: 

What is GAP insurance?
Do I need GAP insurance for a leased car?
Is GAP insurance worth it?

What is GAP insurance?

If you owe money on a car (through a loan or lease) Guaranteed Asset Protection (GAP) insurance is essential. Standard insurance policies – like liability, collision, or comprehensive coverage – can help reimburse costs like:

• Medical charges resulting from an accident.
• Repairing vehicle damage.
• Replacing the vehicle in the event of a total loss.

Instead of covering any physical damages, GAP insurance is like coverage for your finances in the event of a total loss on your vehicle.

How does GAP insurance work?

Here’s an example: you took a loan out to get your car, and your vehicle is declared a total loss after an accident. All passengers are safe, and you get an insurance payout to cover the cost of replacing your vehicle. That’s great, all things considered. But if you still owe more on the car than it’s worth, things get a bit more complicated.

Let’s say you financed your vehicle for $30,000, you’ve paid off $8,000 so far, and your car’s current market value is $15,000. If your car is stolen or totaled, you’ll get reimbursed according to that $15,000 market value. (We’ll ignore your deductible for now, but remember that in real life, you’ll have to factor it in.)

So, you’ve got $15,000 from the payout, but you’re still on the line for the remaining $22,000 balance on your auto loan. Subtract that payout from the remaining balance ($22,000-$15,000) and you'll owe a net of $7,000 on a car you can no longer drive. That $7,000 “gap” in your finances is what GAP insurance will cover so you’re not left hanging during a bad time.

What does GAP insurance cover?

GAP insurance is only helpful for people who owe money (or, have negative equity) on their vehicle. Each policy should be reviewed on an individual basis, but will usually cover your financial “gap” in situations like:

• Total loss from motor vehicle accidents.
• Total loss from natural disasters.
• Vehicle theft.

Do I need GAP insurance for a leased car?

Unlike liability insurance, GAP insurance is not legally required. However, most leasing companies themselves do require this kind of coverage.

How much does GAP insurance cost?

As with any insurance policy, GAP rates are determined by a number of factors. As an add-on to another coverage policy, the bill generally comes to about $20/year. If you (or your lender) decide to make a one-time payment instead, it’ll typically come out to anywhere from $200 to $500.

Is it worth it?

For those with negative equity in their vehicle, we generally recommend GAP insurance.

If you’re leasing, you’re probably already paying for it as part of your agreement. If you’re buying out your leased car or financing a vehicle, it’s most critical if any of the following are true:

• You’re unable (or unwilling) to cover the financial burden in the case of total loss or theft.
• If your desired car depreciates faster than average.
• You have a longer loan term.
• Your down payment (if any) will be low.

Even if none of those apply to you, it still may be a good idea to get GAP. Cheaper policies are fairly affordable, and can cover you big-time should you need it.

Want to learn more about GAP insurance, extended coverage, and your end-of-lease options? Lease End is here with help. Check out the rest of our blog for valuable insight into leasing, tips & tricks for dealing with the dealership, and, of course, lease buyouts. Or, give our advisor team a call at (888) 307-5197 for a personalized quote on extended coverage for a buyout.