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What is gap insurance and what does it cover?

Consumers who finance a car should consider GAP insurance if they want to avoid winding up with a huge gap in their bank accounts.

GAP, which stands for Guaranteed Auto Protection, pays the difference between what the auto insurance company says the wrecked car is worth and what the driver owes on his auto loan. This applies only if the auto insurance company declares that your car has been totaled.

auto insurance gap

Simply put, if someone owes more for the car than what the auto insurance company determines its worth, then the policyholder would have to pay the difference. Given how rapidly the value of a car depreciates, consumers might have to ante up a lot of money for a totaled car.

Many consumers who have car loans are “underwater,” meaning they owe more than the value of the car, says Frank Darras, an insurance attorney in Ontario, Calif. Fewer than 10 percent of motorists have GAP insurance, Darras estimates.

“In this economy, people just don’t have a lot of cash and they need something to drive,” he says. “The last thing they need is a two-by-four in the face because they drive it and are in a crash and end up owing thousands.”

Mark McLaughlin of Davenport, Iowa, is glad he purchased GAP insurance a few years ago when he bought a sleek silver Camaro. Just months after he bought the car, McLaughlin was stunned that the car was vandalized by neighborhood kids. The kids destroyed the car by hitting it repeatedly with metal baseball bats.

“I never thought my car would have been vandalized,” McLaughlin says. “If I hadn’t had the GAP insurance, I would have had to pay at least a few thousand dollars on my old car, plus I’d be making payments on my replacement vehicle.”

Here are eight questions you can ask yourself to get a grip on GAP:

1. Where can I buy GAP insurance?

  • GAP insurance is made available to a consumer when he buys a car from a dealership, says Sarah Holtrup, an insurance agent in Indianapolis.
  • If someone wants to buy a GAP policy after he’s owned the car for a while, he should call the dealership, Holtrup says. Most auto insurance companies don’t offer this type of coverage.

2. How much does GAP insurance cost?

  • A typical policy costs $400 to $700 for the life of the car loan, Holtrup says.
  • Generally, a policy costs less than $1 a day or even as low as $1 a month for the duration of the loan, says Greg McFarlane, author of “Control Your Cash: Making Money Make Sense.”

3. What’s covered — and not covered — by GAP?

  • In some cases, a GAP policy will limit the dollar amount of coverage — for instance, a $4,000 cap.
  • A GAP policy doesn’t cover missed loan payments or late fees, Holtrup says.
  • Most GAP policies won’t cover a motorist’s auto insurance deductible, Darras says.
  • If someone buys GAP insurance and then refinances the auto loan, the GAP policy is void, Holtrup says. In this instance, Holtrup urges a motorist to contact his GAP insurer and consider buying another policy.

4. Who should get GAP insurance?

  • Anyone who is “underwater” with a car loan should consider GAP coverage, McFarlane says. Consumers can buy the coverage before or after purchasing a car.

5. How do I find out whether I’m “underwater” with my loan?

  • Someone who bought a car and put less than 25 percent down often is underwater on the loan, Darras says. Someone whose car loan carries an interest rate of 6 percent or more and is financing the car for longer than three years generally is underwater as well.
  • A motorist can find the value of his car by visiting the Kelly Blue Book website ( or the National Automobile Dealers Association’s website (

6. What if I just bought my car a few weeks ago?

  • Cars depreciate quickly. Even on a new car loan, it’s likely the consumer will owe more than what the insurance company would pay in case a car is totaled. For example, Progressive points out that if you take out a loan for the full cost of a $28,000 and are involved in a crash a few weeks later, the auto insurance company may pay only $24,500. That means the consumer must pay his collision deductible and come up with $3,500 to pay the lender if the car has been totaled.

7. What if I’m leasing my car? Should I still get GAP?

  • In general, someone leasing a car should consider GAP insurance, says Lynne McChristian, the Florida representative for the Insurance Information Institute. Sometimes, the cost of GAP insurance is rolled into lease payments, she says.
  • Certain states, such as New York and North Carolina, require residents who lease cars to buy GAP insurance, McFarlane says. Insurance experts say GAP insurance can be less expensive when it’s for a leased car, but costs can vary.

8. Is GAP insurance available in every state?

  • GAP insurance isn’t sold in some states, such as Connecticut, Louisiana and Virginia, according to McChristian. She urges consumers to check with the state where they live to determine whether GAP is available there.

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