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What is Auto Gap Insurance and What Does it Cover?

When you head to the dealership to bring home a vehicle, you may be leasing or financing your new set of wheels. But what happens if you get into an accident and face a total loss on the vehicle? You’d be responsible for paying the remainder of your lease or loan even though the car is totaled!

Since you’re a responsible driver, you probably have collision coverage, which is what will cover the cost to replace your totaled car. However, your insurance company is only going to pay out the actual cash value of your vehicle — in other words, the fair market value — which is often less than what you still owe on your car. Lease and loan gap insurance helps pay the difference, in the event of a total loss, between what you still owe on your totaled vehicle and what the insurance company determines is the vehicle’s actual cash value — so you won’t be left to cover that potential hefty bill all on your own.

Let’s take a closer look at how gap insurance can help financially protect you.

What Does Gap Insurance Not Cover?

Though having gap coverage can be a financial life saver in the event you were to total your car and still have your lease or loan to pay, don’t confuse its purpose — here’s what gap insurance does not cover:

  • If you’re having trouble making your car payments due to a financial hardship, disability, loss of job, etc.
  • Any repairs to your vehicle
  • The carry-over balance on a loan you may have rolled over into your new car loan
  • Paying for a rental car while your vehicle is in the shop
  • Extended warranties added to your car loan
  • A down payment for a new car
  • Reduced value of your car after an accident

Simply put, lease and loan gap insurance coverage protects you from being put in a situation where you have to pay the difference out of your own pocket (for a vehicle you no longer can drive!), while also having to pay for another vehicle, too.

How Does Gap Insurance Work When a Car Is Totaled?

Here’s the deal — when you drive your vehicle off the dealership lot, according to, its value depreciates around 11 percent, meaning your car is already worth less than what you just paid for it only minutes ago.

Here’s an example of how gap coverage works:

  • You buy a car for $30,500, make a $500 down payment and take out a $30,000 loan with monthly payments of $400.
  • Now, imagine four months later you get into an accident and your car is totaled. Your insurance company decides the actual cash value of your vehicle, or the fair market value, is $26,000. They’ll pay this much (minus the deductible) through your collision coverage on your insurance policy.
  • However, because of the structure of your loan payment, you still have $29,500 to pay on the loan, leaving a gap of $3,500. Without gap insurance, you’d be responsible to pay that entire difference. However, with gap insurance, you’re only responsible for the $500 deductible.
  • Having gap insurance eliminates this deficit, since your insurance company will also pay that gap of $3,000.

What Does Gap Insurance Cover on a Leased Car?

What is gap insurance on a car loan? Actually, gap insurance works similarly whether you lease or finance your car. As stated before (though you aren’t eventually going to own the vehicle) the value of the car depreciates the second you take it off the dealership lot. So, the market value of your leased car is going to be much lower than what is still owed on your lease contract.

If you total the car, you’re responsible for the fair market value of the vehicle and what you still owe on the lease, a.k.a. — the gap. So, your insurance company will pay the actual cash value of your leased car, but you’ll pay for that gap, which could be in the thousands!

Some things to keep in mind about gap insurance for your leased car:

  • Gap insurance is extra important for those leasing a car, and that’s why a lot of leasing contracts include gap insurance by default. Before you purchase gap insurance, check to see if it’s already included by either the leasing company, dealership, or the car leasing insurance company.
  • You can purchase gap insurance after your lease start date.
  • If you lease or finance your car, your dealership will typically require that you have comprehensive and collision coverage, and once you purchase these you can also add the gap coverage.
  • Your deductible is usually not covered by gap insurance, but some plans do cover the deductible, so be sure to check with your provider.
  • You may have to continue paying your lease payments until your insurance claim is completely settled.

Does Gap Insurance Cover Theft?

Does gap insurance cover stolen cars? In order to get the benefits of gap insurance if your vehicle is stolen, you’re auto insurance company will have to declare the vehicle a total loss. This happens in two ways: if your vehicle is recovered with enough damage done to it by the people who stole it, or if your vehicle is never recovered — usually, insurance companies will have a waiting period to allow time for your car to show up.

If your insurance company does declare your car a total loss, they will pay out the fair market value of the vehicle, which sometimes is less than what you still owe on the vehicle, even if it were stolen. So, similar to if you crash your car, total it, and have a “gap” to pay, you may have that same gap to pay for if your car was stolen.

Keep in mind, every insurance company is different, and though most cover theft with gap insurance, you’ll want to check to see how a stolen vehicle is handled with your specific provider.

Still not sure if you need gap insurance? Keep reading to find out when you need lease/loan gap coverage.

Minimize financial loss after a total loss with gap insurance — check out our lease/loan gap coverage and connect with an American Family Insurance agent to get the protection you deserve.

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Related Topics: Car Insurance