What is Gap Insurance? Do You Need It? All You Need to Know
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Discover the methodologyGap insurance helps pay the difference between what you owe on your car loan or lease and the car's actual value if it's totalled or stolen. This way, you're not left paying for a car you no longer have.
But is it right for you? How does it work? What does it cost? We've got you covered. In this guide, we cover everything you need to know about Gap Insurance in Canada.
Gap Insurance Canada: 5 Key Takeaways
- Fills the financial gap between your car's value and loan balance (if stolen or totalled).
- Helps solve problems like rapid depreciation, longer loans and lease requirements.
- Costs between $400 and $800 annually in Canada.
- Newer cars with lower mileage generally have higher gap insurance costs.
- Covers vehicles up to 10 years old or with less than 100,000 miles.
What is gap insurance?
Gap insurance, short for Guaranteed Asset Protection (GAP), is an optional add-on for car insurance policies. The main purpose of GAP insurance is to cover the difference between your car's actual cash value (ACV) and the amount you still owe on your loan or lease if your car gets stolen or totalled in an accident.
How is it different from standard car insurance?
- Standard car insurance reimburses you for the car's current market value, which depreciates over time.
- This can create a gap between what your insurance pays and what you still owe on the loan.
- Car insurance with gap bridges this gap, preventing you from having to pay extra out of pocket for a car you no longer have.
Is gap insurance worth it?
Here are some situations where GAP insurance might be a good idea:
- You financed a new car with a low down payment — less than 20%.
- You financed your car for a long term — more than 5 years.
- You leased a car (GAP coverage is usually required for leases).
- You rolled negative equity from a previous car loan into your new loan.
- You bought a car that depreciates faster than average.
To get a better idea, explore car insurance with gap options from various providers in Canada — cost, coverage, exclusions and more.
You can use our tool below to compare coverage and get car insurance quotes online from Canada's best providers. It's free to use and gives you quick results.
Compare Canada's best car insurance plans
Why do people need gap insurance in Canada?
You might need car insurance with gap coverage in Canada for a few key reasons:
- Fast depreciation of new cars: New cars in Canada lose value rapidly, especially in the first few years. This means the gap between the car's worth (what insurance pays) and the loan amount (what you still owe) can grow quickly. GAP bridges that gap if your car is totalled early in the loan term.
- Loan terms and negative equity: Longer loan terms (over 5 years) are common in Canada. Combine that with a low down payment and you could owe more than the car's worth for a significant period. GAP protects you from being stuck paying for a car you can't drive.
- Leased vehicles: In Canada, GAP coverage is typically required for leased vehicles. Since you never own a leased car, GAP ensures you won't owe money on a car you no longer have if it's stolen or totalled.
And then we have unpredictable events. Accidents and thefts can happen anytime. GAP provides peace of mind that you won't face a financial burden on top of dealing with a lost car.
Good to know
You need to have collision and/or comprehensive coverage for GAP insurance to work. Also, GAP insurance typically only applies to financed or leased vehicles.
What does gap insurance cover?
Car insurance with GAP generally covers the following conditions:
- Total Loss: If your car is declared a total loss due to an accident, fire, or natural disaster.
- Theft: If your car is stolen and not recovered.
These conditions activate the coverage to pay the difference between the actual cash value of the vehicle as determined by your auto insurance and the outstanding balance on your loan or lease.
However, it does not cover deductibles, mechanical repairs, or late payments on your loan or lease.
How does gap insurance work?
Here's a step-by-step breakdown of the process:
- Your car gets totalled: Unfortunately, your car is stolen or suffers enough damage in an accident that it's considered a total loss.
- Standard insurance pays out: Your auto insurance policy (collision and/or comprehensive coverage) kicks in and assesses the car's current market value (ACV). They then pay you this amount, minus your deductible.
- The gap emerges: Because cars depreciate, the ACV from your insurance might be less than the outstanding balance on your loan or lease. This difference is the "gap."
- Gap insurance fills the gap (if applicable): If you have GAP insurance, it will now assess the difference between the ACV your standard insurance paid and your remaining loan balance. The company will then pay you the difference, minus any deductible specific to GAP coverage (which may not exist).
To further understand how car insurance with gap coverage works, take a look at this example:
For example
- You buy a new car for $30,000 with a loan and put down a 10% down payment ($3,000).
- Two years later, the car's ACV is $20,000, but you still owe $25,000 on the loan.
- There's a $5,000 gap between what your insurance pays ($20,000) and what you owe ($25,000).
- If you have GAP insurance, it would cover this $5,000 gap, minus your GAP deductible (if applicable).
How much does car insurance with gap coverage cost in Canada?
The cost of GAP insurance in Canada varies depending on several factors, but you can expect to pay somewhere between $400 and $800 per year.
Your cost for car insurance with gap coverage can vary based on these factors:
- Vehicle value and loan amount: The higher the value of your car and the larger your loan, the more GAP insurance will cost. This is because the greater the potential gap between the ACV and your loan balance.
- Length of loan term: Longer loan terms (over 5 years) typically mean a higher GAP premium since the car has more time to depreciate and create a larger gap.
- Age and mileage of the car: Newer cars with lower mileage generally have higher GAP costs due to their faster depreciation rate.
- Make and model: Certain cars that tend to depreciate faster might come with a higher GAP premium.
Also, the company you purchase GAP insurance from can affect the price. Dealerships often offer GAP coverage, but it may be more expensive than getting it from your auto insurance provider.
To ensure that you get a fair deal, use our comparator to compare prices for car insurance with gap coverage.
What does car insurance with gap coverage exclude?
Gap insurance helps you financially in specific situations, but it doesn't cover everything. For instance, it doesn’t cover comprehensive or collision coverage.
GAP relies on your existing auto insurance to determine the ACV of your car. If you don't have comprehensive or collision coverage (which covers theft and total losses), GAP won't be triggered because there's no initial payout from your insurance.
Here are some other common exclusions you should be aware of:
- Certain vehicle types: Some providers may exclude vehicles used for commercial purposes (taxis, delivery vans), racing or off-roading.
- Age and mileage limits: There might be limitations on car age or mileage eligibility. For instance, a provider might not offer GAP coverage for cars older than 10 years or with over 100,000 miles.
- Manufacturer or value restrictions: Occasionally, GAP coverage might be excluded for specific car manufacturers or high-value vehicles.
- Unreported accidents: If you haven't reported an accident that affects the car's value, a GAP claim might be denied.
- Misuse of the vehicle: Using the car for illegal activities or violations can void GAP coverage.
- Loan/lease specifics: GAP typically doesn't cover things like penalties for late payments on your loan or lease, security deposits or negative equity rolled over from a previous loan.
Additionally, you won’t get any coverage for non-financial losses. GAP insurance strictly deals with the financial gap between the ACV and your loan balance. It doesn't cover repairs, diminished value due to an accident, a rental car while yours is being repaired or any personal injury.
<strong>Is gap insurance mandatory in Canada?</strong>
No, gap insurance is not mandatory in Canada. It's an optional add-on you can choose for your car insurance policy.
How does gap insurance differ from a waiver of depreciation?
Gap insurance and waiver of depreciation both aim to protect you from financial loss due to a car's depreciation, but they work in different ways and have different providers.
Car insurance with gap coverage
- Offered by independent insurance companies or car dealerships as an add-on to your auto insurance policy (collision and/or comprehensive required).
- Covers the gap between your car's ACV at the time of a total loss and the remaining loan or lease balance.
- Ideal for situations where you have a low down payment, a long loan term or a car that depreciates quickly.
- May have a separate deductible specific to GAP coverage.
Waiver of depreciation
- Offered by your auto insurance company as an endorsement added to your existing comprehensive and collision coverage.
- Waives depreciation for a certain period (usually 2-5 years) after you purchase a new car.
- Pays you the car's original purchase price (or sometimes the Actual Retail Value) in the event of a total loss during the covered period.
- Generally more expensive than GAP insurance, especially for older cars.
- May not be available for all vehicles or insurance companies.
Here's a quick summary of key differences:
| Feature | Car Insurance With Gap Coverage | Waiver of Depreciation |
|---|---|---|
| Provider | Independent company/Dealer | Auto Insurance Company |
| Purchase Method | Add-on to auto insurance | Endorsement to policy |
| Covers | Gap between ACV & loan | Depreciation for a period |
| Ideal for | Low down payment, long loans | New cars, short coverage gap |
| Deductible | May have separate deductible | Uses your standard deductible |
| Cost | Generally less expensive | Generally more expensive |
| Availability | Widely available | May have limitations |
Choosing between the two
- If you financed a new car with a low down payment and a long loan term, GAP insurance might be a better option due to its wider coverage and potentially lower cost.
- If you want guaranteed coverage for the car's original value for a set period (typically for newer cars), a waiver of depreciation might be preferable.
The market is full of options, and making a choice can be overwhelming. Understanding the key offerings of different providers and comparing their rates can help you make an informed decision — and our comparator can help you compare.
Who sells gap insurance coverage?
Gap insurance coverage in Canada is offered by various insurance companies, including major providers like Allstate, TD Insurance, and Desjardins, among others. Additionally, some car dealerships and lenders may offer gap insurance as part of their financing packages. It's essential to shop around and compare quotes to find the best coverage for your needs.
You can use our free tool below to explore coverage from the best providers in Canada and get personalized car insurance quotes online right now.
Compare Canada's best car insurance plans
FAQs on car insurance with gap
Do I need gap insurance if I have full coverage?
Even with full coverage auto insurance in Canada, gap insurance can be beneficial. Full coverage pays the actual cash value of your car, which might be less than what you owe due to depreciation. Gap insurance covers this difference, protecting you financially if your car is totalled or stolen and you owe more than it's worth.
Can I cancel gap insurance?
Yes, you can typically cancel your car insurance with gap coverage. If you decide you no longer need it or have paid off your loan to the point where the actual cash value of your car meets or exceeds what you owe, you might choose to cancel your gap insurance policy. Here's how you can go about it:
- Review Your Policy: Check the terms of your gap policy to understand any specific cancellation procedures or potential penalties.
- Contact Your Insurer: Reach out to the insurance company or the dealer from whom you purchased the gap coverage to initiate the cancellation process.
- Request a Refund: If you paid the gap coverage premium upfront, you might be eligible for a prorated refund, depending on how much time has passed since the policy started.
- Confirm Cancellation: Ensure that you receive confirmation of the cancellation in writing to avoid any misunderstandings about your coverage status.
How long does gap insurance last?
Gap insurance typically lasts for the term of your vehicle loan or lease. It is designed to cover the duration when the balance owed might exceed the car's value. You can cancel it earlier if it's no longer needed as your loan balance decreases.
Should I get gap insurance from a dealer or insurance company?
It's usually more cost-effective to buy gap coverage from an insurance company rather than a dealer, as dealers tend to mark up prices. Insurance companies offer more flexibility, allowing you to cancel the coverage when it's no longer needed. However, purchasing from a dealer can be more convenient during the car buying process. Always compare costs and coverage details before making a decision.
Does gap insurance cover the entire loan?
No, gap insurance typically covers the difference between the car's value and the remaining loan balance. It doesn't cover additional expenses like overdue payments or penalties.
