You are responsible for paying off your car loan during an accident, even if your insurance payout is insufficient. This is where gap insurance can help.

Gap insurance isn't for you if you don't have a car loan or lease.

Gap insurance covers what's owed on a car after a total loss

Lenders typically require you to purchase collision and comprehensive coverage when you buy or lease a new car. Collision insurance covers damage to your vehicle in the event of a collision with another vehicle or if you collide with an object such as a pole or a tree, whereas comprehensive insurance can cover things like fire or vehicle theft.

Comprehensive and collision insurance only pay the market value of a vehicle at the time of theft or accident. Gap insurance comes in handy when you owe more on your car loan or lease than that.

Most gap insurance policies do not cover your comprehensive or collision deductibles. Your deductible is the amount deducted from a claim payout by your insurance company.

How gap insurance works

Assume your new car is worth $25,000 and you have a $30,000 loan when it is stolen. You have comprehensive insurance, which will cover the value of your vehicle at the time of theft, minus your $500 deductible. So the insurance company pays your lender $24,500, but you still owe $5,500 on your loan. You will contribute $500 to cover your deductible.

Gap insurance is intended to pay the final $5,000 so that you do not owe money on a totaled vehicle.

Without gap insurance, you'll be responsible for both the loan balance and the insurance deductible.

That example is summarized below.

Is gap insurance worth it?

Many people do not require gap insurance. You don't need this coverage if you don't lease or have a loan, or if your loan is paid off below the value of your car.

Finally, if you have a lease or a newer loan, consider whether you can afford to pay the difference between the balance and the value of your car. If you can't or don't want to deal with that situation in an emergency, gap coverage may be beneficial.

Gap insurance providers

Gap insurance is typically available only within three years of purchasing a new car. Although insurers' policies differ, a business may require one or both of the following:

• Your car is only two to three years old.
• You are the original owner of the vehicle.

There are three main ways to buy gap insurance:

• From your auto insurer, as part of your regular insurance payment.
• From a company that only sells gap insurance. Stand-alone gap insurance is typically purchased online as a one-time transaction from a website such as Gap Direct.
• Through the dealership or lender, rolled into your loan payments.  With this arrangement, you pay interest on the cost of your gap insurance over the life of the loan, increasing the cost of the coverage significantly.

If you buy through your dealership or lender:

• If you have a car loan, first check your contract to see if gap insurance is required. Although some lenders may require it, it is uncommon. However, your lender will almost always require you to purchase comprehensive and collision insurance.
• If you lease your car, the dealer may automatically include gap insurance, so double-check your lease agreement.
• If you already purchased gap insurance from your dealer and wish to purchase it from your insurer, you may be able to do so. If you change providers, make sure you have coverage during the transition.

Insurance companies that sell gap coverage

The following are some of the largest insurance companies that provide stand-alone gap insurance as add-ons to car insurance policies:

• American Family.
• Auto-Owners
• Liberty Mutual.
• Nationwide.
• Travelers.
• USAA.

How much does gap insurance cost?

According to the Insurance Information Institute, auto insurers typically charge a few dollars per month for gap insurance, or around $20 per year. Your cost is determined by individual factors such as the value of your vehicle. You must also purchase comprehensive and collision coverage. Compare car insurance rates from at least three insurers to find the best one for you.

According to United Policyholders, a nonprofit consumer group, lenders charge a flat fee of $500 to $700 for gap insurance, though credit unions may charge less.

Remember that if you add the coverage to your loan, you will have to pay interest on it as well. That means you could pay more than $700 from a dealer for three years of gap coverage, compared to $60 from your auto insurer.

Prices and interest rates will vary, so always compare costs with your dealer and car insurance company.

Alternatives to gap insurance

If your car is stolen or totaled, gap insurance isn't the only way to protect yourself. Here are some other options to consider.

• New-car replacement insurance: If you're more concerned with purchasing a new vehicle than with paying off your old one, new-car replacement insurance may be a better option for you (albeit more expensive). This coverage pays for a new car of the same make and model, less your deductible, to replace your vehicle.
• Better-car replacement coverage: If your vehicle is declared a total loss, this type of coverage will reimburse you for a newer, lower-mileage model.