What is gap insurance and how does it work?
Insurance to make sure you can pay off your car loan if your vehicle is totalled or stolen.
If you finance or lease a car, you might be considering getting guaranteed auto protection (Gap) insurance. Gap insurance is optional cover that helps cover the cost of a car loan or lease if your vehicle is totalled or stolen.
Keep reading to find out how gap insurance works and whether it’s worth the cost.
How does gap insurance work?
New cars are notorious for depreciating in value rapidly. As the saying goes, a new car loses 10-15% of its value as soon as it’s driven off the dealer’s lot.
That’s part and parcel of buying a car, but if your new vehicle is leased or financed, it means you end up owing more to your lender than the vehicle is actually worth. So if your car is stolen or totalled in an accident, the payout from your regular car insurance policy won’t be enough to pay off your loan or lease.
This is where gap insurance comes in. It covers the difference between your insurance payout and the outstanding amount on your car loan.
For example, let’s say you took out a car loan and bought a car for $20,000. Then your car is stolen a year later.
- Your insurer pays you $15,000 for your stolen car’s value, which is what it’s worth at the time it is stolen.
- You still owe $18,000 on your car loan. Your insurance payout of $15,000 isn’t enough to pay off the rest of your loan.
- Gap insurance pays for the difference of $3,000 to cover the rest of your loan.
- Without gap coverage, you’d owe the lender $3,000 on a car you no longer have.
Is gap insurance worth it?
Gap insurance is optional cover, so is it worth paying for? As the example above shows, the biggest benefit of gap insurance is that it covers you if you still owe a large amount on your car loan.
This is a risk worth considering if you finance or lease a new car. On average, new cars lose 25% of their value by the end of the first year and lose about 17.5% each following year. And if you need to buy another car after yours is written off, having outstanding debt on a car loan could make it much harder to get the financing you need for a replacement vehicle.
As a general guide, gap insurance costs approximately 5% of your collision or comprehensive insurance. So whether you get cover or not may depend on the level of risk you’re comfortable with — would you rather stump up the extra cash for complete protection, or run the risk of being left with a hefty debt to pay if the worst occurs?
Gap insurance might be worth it if you:
- Are buying or leasing a new car
- Have a car loan with repayment terms of 60 months or longer
- Are putting a small down payment or no down payment on your vehicle
- Are buying a high-value car that will depreciate quickly
- Rolled over an old car loan into your new loan
When should I skip gap insurance?
You don’t need gap insurance if you don’t have a car loan or lease. You can also generally skip gap insurance if:
- You’re buying your car outright without any financing.
- You’re making a down payment of 20% or more on your car loan.
- You’ve paid down your car loan to the current value of your vehicle.
- You’re buying a used car.
- You can afford to cover any losses if your car is written off or stolen.
How much does gap insurance cost in Canada?
Gap insurance usually costs around 5% of your comprehensive or collision insurance premium. However, premiums vary depending on the make and model of your vehicle. You also typically only need coverage for a few years while you pay down your loan.
You can add gap insurance to your existing car insurance policy, while your car dealer will also offer cover. It’s generally cheaper to buy a policy through your insurer or financing company rather than a dealership, but it’s worth noting that not all insurers offer gap insurance.
Finder survey: What is the typical annual car insurance premium?
| Response | Male | Female |
|---|---|---|
| $1001 to $2,000 | 34.41% | 31.56% |
| $501 to $1,000 | 18.42% | 16.17% |
| I don't have a car | 8.5% | 12.62% |
| $201 to $500 | 11.34% | 11.83% |
| $2001 to $3,000 | 10.12% | 10.85% |
| Under $200 | 6.48% | 8.09% |
| More than $3,000 | 5.47% | 4.34% |
| I have a car but I don't have car insurance | 5.26% | 4.54% |
Source: Finder survey by Pollfish of 1001 Canadians, January 2024
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When does gap insurance not pay?
You need to have basic car insurance in place in order to qualify for gap insurance. There are also a few circumstances and costs that gap insurance will not cover, such as:
- Your car is not a total loss — partial damage is not covered by gap insurance
- Modifications to your vehicle
- Extended warranties
- You’re not up to date with premium payments
What should I watch out for?
- Check any exclusions listed in your policy that might prevent a payout, like if you were driving under the influence and wrote off your car.
- Gap insurance is generally only available if you have comprehensive coverage. However, your lender will typically require you to have comprehensive insurance anyway.
- Gap insurance from a dealership will generally be more expensive.
Example: John's accident
John buys a new car for $30,000 using a car loan provided by a finance company. But when John is involved in an accident just a few months later, his car is written off.
John still owes $28,600 on his loan, but his car’s market value at the time of the accident is $25,500. He makes a claim on his collision insurance and receives a payout of $25,500, which is not enough to pay off his loan. Not only does John not have a car, he still owes his lender $3,100.
Luckily, John uses his car gap insurance to cover the $3,100 he needs to pay off the rest of his loan. Without gap insurance, John would have had to pay this amount out of his own pocket.
* This is a fictional, but realistic, example.
Bottom line
Gap insurance can keep you from paying an arm and a leg if your car is written off or stolen while you still owe money on it. It’s worth considering if you’re financing or leasing a new car, but make sure to compare premiums and coverage features across a range of insurers before choosing a policy.
Frequently asked questions about gap insurance
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