Do you need Gap Insurance?

When Roger purchased his new Ford Mustang, he wasn’t concerned about his car payment. He earned enough money to make his monthly payments. Roger went to the car dealer, signed the contract, and drove away in his new car. A short time later his car was in an accident, and he discovered that he owed more on his car then it was worth. After the insurance company offered him a settlement, he still owed the finance company $7,000. Roger was worried because he didn’t have $7,000 in his bank to pay off his loan.

What happened to Roger is not unique. The question might arise why the insurance company did not pay the total amount of the loan? Most car insurance policies will only pay the market value or actual cash value of the car. Here is where gap insurance comes into play.

What is Gap Insurance?

Guaranteed Auto Protection, or gap insurance, is an optional protection plan offered by an insurance company and sold by a finance company, bank, or your car insurance company when you purchase a car. If your car is in an accident or stolen, then gap insurance will pay the difference between what an insurance company will pay you (the market value or actual cash value) and what you owe the bank if your car is a total loss.

An automobile dealership will usually offer you gap insurance when you have a negative equity loan. Negative equity is created through a small down payment or if there is little to no value on your trade-in. Since the value of a car depreciates rapidly, you could find that your loan balance exceeds the value of the car in a very short time. Remember that the insurance company is evaluating the market value of the car, not the loan balance.

For example, let’s assume that your recently purchased car has a loan balance of $20,000, and you are involved in an accident. The car is a total loss. At this time, you discover that the actual value of the car is only $15,000. Gap insurance would pay the difference between what you owe the bank ($20,000) and what the insurance company settlement amount is ($15,000). In this case a total of $5,000.

  • Car Financed Amount: $20,000
  • Value at the Time of Loss: $15,000
  • Shortage Paid by Gap: $ 5,000

Using this example, if you do not have Gap insurance, then you would still owe the finance company $5,000.

When Roger bought his new Mustang, he put no money down on his purchase. The dealership also took his trade-in, even though he owed more than what it was worth. With some creative financing, Roger was able to drive his Mustang away owing several thousand dollars more than what it was worth. The good news for Roger was the dealership offered him gap insurance, and he took it, not realizing how important it would be to him in a few months. Since Roger purchased the gap insurance, he did not have to pay the $7,000 he still owed on his loan.

Not every story ends as well as Roger’s because many people reject gap insurance.

If you are wondering if you need gap insurance, contact your agent. Your agent should be able to tell you if you are a candidate for gap insurance, and they can also review with you other limitations and restrictions on gap insurance that you should know.

Contact Brown Insurance for answers to your personal insurance questions. We can be reached at 520-888-6900 or send us an email at