What is auto gap insurance, and what does it cover?

Buying a new set of wheels is exciting — whether you’re upgrading to a newer vehicle or driving off the lot in your dream car. You’ve worked hard to make this moment a reality, so protecting your investment is as important as celebrating it.

Most drivers know that comprehensive and collision insurance help cover damages if your car is totaled in an accident. But did you know these coverages typically only pay out your car’s actual cash value — in other words, the “fair market value” — which is often less than what you still owe on your loan or lease? You are financially responsible for the difference between those two amounts.

This is where gap insurance comes in. After a total loss, a gap plan like Lease or Loan Assistance Coverage from American Family Insurance may help cover the difference between what you owe and your car’s fair market value, so you’re not left paying for a car you can no longer drive.

Let’s take a closer look at how gap insurance works, who needs it, and what it does (and doesn’t) cover.

Do I need gap insurance?

If you’re leasing or financing your vehicle, gap insurance could be a smart addition to your protection plan — especially if you made a small down payment or your loan balance is higher than your car’s current value.

Remember, cars can depreciate quickly. If you’re in an accident on the way home from the dealership, you could already be upside down on your loan, meaning you owe more than your car's worth. Gap insurance may help cover the remaining balance after your insurance pays the actual cash value of your vehicle if it’s totaled in a covered loss.

Does having a lease or loan mean you always need gap insurance? Nope. Gap coverage is designed for situations where the outstanding balance of your loan or lease is more than your car's value. So, if you owe less than your car is worth, gap insurance isn’t necessary. Keep in mind, if you choose not to add gap coverage, it’s best to make sure your loan balance stays below your vehicle's actual cash value to protect yourself from a substantial loss.

How does gap insurance work?

According to Edmunds.com (Opens in a new tab), when you drive your vehicle off the dealership lot, its value depreciates around 11%. That means your car is already worth less than what you paid for it just minutes before.

Here’s a real-life example:

You buy a car for $30,500, make a $500 down payment, and take out a $30,000 loan. Four months later, your car is totaled in an accident. Your insurance company says your vehicle's actual cash value is $26,000. They pay that amount minus your $500 deductible through your collision coverage.

However, you still owe $29,500 on your loan, leaving a $3,500 gap. Without gap insurance, you’d be responsible for paying that difference. With gap insurance, you’d be responsible for the $500 deductible, and your insurer may help pay the remaining $3,000.

What does gap insurance not cover?

Gap insurance is a valuable safeguard, but it’s important to know its limits. Here’s what gap insurance does not cover:

• Missed car payments due to financial hardship, disability, loss of job, etc.
• Repairs to your vehicle
• Carry-over balances from previous loans rolled into your new car loan
• Rental car costs while your vehicle is in the shop
• Extended warranties added to your car loan
• Down payments for a new car
• Reduced value of your car after it’s damaged but not totaled in an accident

Simply put, gap insurance may help cover the difference between what you owe on your car and its actual cash value if it's totaled in a covered accident. It helps you avoid paying for a vehicle you can no longer drive while also needing to buy another car.

Do I need gap insurance on a lease?

Gap insurance can be vital for those leasing a car. That’s why many lease agreements include it by default. Check with your leasing company, dealership, or insurance agent to see if it's included.

The important thing to know is that gap insurance on a leased car helps protect you in much the same way as it would if you took out a loan. If you total the car, you’re responsible for the gap between its fair market value and your lease balance. Gap insurance may help cover that difference, less your deductible, so you’re not left with a hefty bill.

Keep in mind:

• Dealerships typically require comprehensive and collision coverage for leased or financed vehicles. You can add gap coverage alongside these protections.
• While your deductible is usually not covered by gap insurance, some plans may pay it — ask your provider to be sure.
• You may have to continue making your lease payments until your insurance claim is settled.

Does gap insurance cover theft?

Many auto insurers offer gap insurance for theft, but coverage details vary, so always check your policy or ask your agent.

At American Family, our Loan or Lease Assistance Coverage covers your vehicle if it is stolen and deemed a total loss. This can happen if your vehicle is recovered with extensive damage from the theft or if it isn’t recovered after a specified waiting period.

If either of these two conditions is met, your insurer may help pay the car’s fair market value, minus your deductible, which can often be less than what you still owe. That’s where gap insurance could step in to help pay the difference; without it, you'd be responsible for the full gap balance.

Is gap insurance required?

Typically, gap insurance is essential if you lease or finance your car and its value is less than what you owe. If you've confirmed that gap coverage is not included in your lease contract, you can purchase it through your insurance company for just a few extra dollars per month — and possibly save thousands in the event of a total loss.

How to get gap insurance

Adding gap coverage to your car insurance is a simple and affordable way to make sure your investment is protected. Connect with your American Family Insurance agent today to learn more about adding Loan or Lease Assistance Coverage to your auto policy.

This article is for informational purposes only and based on information that is widely available. This information does not, and is not intended to, constitute legal or financial advice. You should contact a professional for advice specific to your situation.

This information represents only a brief description of coverages, is not part of your policy, and is not a promise or guarantee of coverage. If there is any conflict between this information and your policy, the provisions of the policy will prevail. Insurance policy terms and conditions may apply. Exclusions may apply to policies, endorsements, or riders. Coverage may vary by state and may be subject to change. Some products are not available in every state. Please read your policy and contact your agent for assistance.