Read time: 2.5 min

You just bought a new vehicle. It’s shiny, it has that new-car smell and you’re feeling great about finally upgrading your ride. But the moment you sign the dotted line, your car’s value starts to drop. Fast.

You may have heard that a car loses value the moment you drive it off the lot, and it's true. As soon as you leave the dealership, your car is no longer considered “new,” which means you likely couldn’t sell it for what you just paid. The fact is, cars depreciate. It’s a normal part of ownership, but it can lead to an unexpected financial gap if something happens to your vehicle.

Let’s say your vehicle is stolen or totaled in an accident. A lot of drivers assume their “full coverage” insurance will take care of everything. What people may not realize is that standard insurance typically pays only the actual cash value of your car at the time of loss, which is the replacement cost minus depreciation, not what you still owe on it.

That’s the risk. If you still owe more on your loan or lease than what your car is worth, you could be left covering the difference yourself. This is where gap insurance comes in.

Gap insurance is designed to cover that remaining amount. For example, if you owe $15,000 on your car but it’s only worth $10,000 when it’s totaled, your standard insurance would pay the actual cash value, minus your deductible. Gap insurance could step in to cover the remaining $5,000, so you're not stuck paying out of pocket for a car you no longer have.

Who Benefits Most from Gap Insurance?

Gap insurance is especially useful for drivers who finance or lease a vehicle with little or no down payment. In the event of a total loss or theft, it can help cover the remaining balance on your loan or lease, providing peace of mind and helping you move forward without leftover debt.

With longer loan terms becoming more common, often 70 or even 84 months, many drivers spend a larger portion of time owing more than the vehicle is actually worth. It’s a risk some people don’t even realize they’re taking.

To add gap insurance to your policy, your vehicle must also have comprehensive and collision coverage. The best time to get it is shortly after financing or leasing your vehicle, which is when your loan balance is likely to be higher than your car’s current value.

It helps to understand how long you might be financially exposed, typically early in your loan or lease when your vehicle’s value is still catching up to what you owe. As you pay down your loan and your car depreciates more slowly, the gap may eventually shrink or disappear.

Know What You Owe

Still unsure if you need it? Download our free "Know What You Owe" tracker to to compare your current vehicle value with your loan or lease balance. It’s a simple worksheet you can fill out in just a few minutes, and it can help you see whether gap insurance might be a smart move.

A car’s value can drop fast, but your loan won’t. Gap insurance helps bridge that difference.
To start the process of adding gap insurance to your car insurance, contact your local independent agent today.

Disclaimer: This article is not expert advice. The analysis of coverage is in general terms and is superseded in all respects by the Insuring Agreements, Endorsements, Exclusions, Terms and Conditions of the Policy. Some of the coverage mentioned in this material may not be applicable in all states or may have to be modified to conform to applicable state law. Some coverages may have been eliminated or modified since the publishing of this material. Discounts may not be available in all states. Limitations and conditions may apply. Premiums will be based on benefits chosen. Please check with your local Independent Auto-Owners Insurance Agent for details.

Copyright Auto-Owners Insurance Company © 2025. All Rights Reserved