Gap Insurance in California

Many have heard the old wisdom that new cars begin to lose value as soon as you drive them off the dealership lot. In fact, according to the Insurance Information Institute, most cars lose 20 percent of their value within a year.¹ So what happens if you get into an accident, or your car is stolen, and the amount you still owe is greater than the value your insurance pays out? Gap coverage pays for the difference, ensuring you don’t owe money on a totaled or stolen vehicle.

What It Covers

• The remaining balance on a loan or lease after an insurance payout in the event of theft or total loss

What It Doesn’t Cover

• The cost of a new car
• Injuries, medical expenses, or funeral costs
• Your collision and comprehensive coverage deductible (in most cases)
• Lost wages
• Late fees or missed payments

The nitty-gritty of how gap coverage works can be confusing, which is why we’ve broken it down below.

Example

Let’s say you buy a new car for $30,000. You put down $3,000, and you finance the rest for $27,000 plus interest. A month later, someone steals your car. At this point, the value has depreciated to $23,000.

You have comprehensive insurance, so your insurance company pays out the value of the car minus your deductible, but you still owe $4,000 on your car loan balance, plus the deductible amount. Gap insurance covers this difference.

How much you’ll pay for gap insurance in California depends on a few factors.

By Vendor

In general, the least expensive route to gap coverage is to add it to an existing full coverage policy. However, if your insurance company does not sell gap coverage (not all do), it will still be cheaper to buy a gap policy for another insurance provider rather than through a dealership, manufacturer, or lender. If you can’t buy gap insurance from an insurance company, credit unions tend to have the next-best prices.

By Company

The cost of gap coverage, much like the cost of car insurance in California generally, will vary from person to person. That’s because each provider uses its own unique formula to determine premiums. On average, you can expect to pay around the following:

By City

Los Angeles is the most expensive city for gap insurance in California due to high levels of traffic and incidents of vehicle theft. Indeed, in 2022, more than half of car thefts in the entire state took place in Southern California, and nearly 60 percent of thefts in Southern California took place in Los Angeles County.² In general, car insurance in California can be expensive in part due to the high cost of living and population density.

By Age

Drivers in their teens and twenties tend to pay the most for gap insurance due to their inexperience behind the wheel.

The minimum car insurance in California includes liability coverage only, not gap coverage. California law prohibits lenders from requiring gap insurance as a condition of an auto loan or sale.

In 2023, the California state government passed California Assembly Bill 2311, legislation restricting the sale of gap waivers in the state. A gap waiver functions similarly to gap insurance in that it covers the difference between what you owe for the vehicle’s value in the event of a total loss. Typically, you’ll get a waiver if you purchase through your lender or financial institution, and you’ll get insurance if you purchase through a dealership or insurance company.

The laws governing gap waivers in California include the following:

• Allows buyers to cancel the gap waiver at any time and requires lenders to refund any prepaid, unearned charges
• Requires lenders to clearly disclose that gap waivers are entirely optional and cannot be a condition to a loan or sale terms
• Stops lenders from selling gap waivers in cases where they’re unnecessary (e.g., the vehicle owner is not underwater on the loan or lease), unless the buyer agrees after a conspicuous disclosure
• If a seller breaches the termination stipulations of a gap waiver, the buyer can recuperate triple the amount of prepaid gap charges
• Limits the cost of a gap waiver to no more than 4 percent of the loan amount

Ideally, your gap coverage will pay for any amount left on the loan after the insurance payout (not including the deductible). That said, some gap policies limit how much you can receive; for example, only up to 25 percent of the car’s actual cash value. You can find out how much your car is worth through sources like Kelley Blue Book, Edmunds, and J.D. Power.

Gap insurance makes sense for some drivers but not others. According to the Insurance Information Institute, drivers who meet any of the following criteria should consider gap insurance:

You Should Buy Gap Insurance If You

• Put down less than 20 percent
• Leased a vehicle
• Financed for five years (60 months) or longer
• Rolled over negative equity from a previous loan into a new loan
• Bought a vehicle that depreciates more quickly, like a luxury or sports car

You Should Not Buy Gap Insurance If You

• Own your car outright
• Paid off enough of your loan that you’re no longer underwater
• Made a down payment of 20 percent or more
• Are paying off the vehicle in less than five years

The process for buying gap insurance differs slightly depending on where you buy it, whether through an insurance provider, dealer, lender, or manufacturer.

When to Get Gap Insurance

It’s best to shop for gap insurance before you go to the dealership to buy your car; that way, you have time to compare options and make a decision. If you have a sense of what car you’re going to purchase, you can get quotes ahead of time and finalize the insurance purchase at the dealership when you’re buying the car. You should have the policy in hand by the time you drive off the lot so that you’re covered right away.

Options

We recommend checking with your current insurance provider first to see if it offers gap coverage as an add-on to your existing policy, as this will be the cheapest option. If it’s not available, we’ve rounded up the best insurance companies for gap insurance.

Consider buying a stand-alone policy or getting a quote and seeing if it makes sense to switch your entire policy. You can often purchase gap insurance directly from a credit union, which may offer lower rates compared to dealerships or traditional insurers. Finally, you can buy gap insurance from the dealership, though this is the most expensive option.

Best and Cheapest Companies

Mercury, USAA, and Progressive have some of the cheapest gap insurance in California. When shopping for any type of insurance, get a quote from at least three companies.