Is Gap Insurance Required in California?

California state law prohibits lenders from requiring guaranteed asset protection (gap) insurance — a type of auto insurance that may be obtained as a policy endorsement from a traditional insurer or a waiver from a car dealership or other financial institution. If your car is totaled and you still owe money on your auto loan, gap insurance can pay out the difference between the actual cash value (ACV) of your car and your outstanding loan balance.

To learn more about coverage specifics and regulations surrounding gap insurance, California drivers should check out the rest of the article below.

On This Page

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  What Is California Gap Insurance?

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  Is Gap Insurance Required in California?

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  How Does Gap Insurance Work in California?

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  What Does California Gap Insurance Cover?

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  How Much Does Gap Insurance Cost in California?

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  Companies That Offer Gap Insurance in California

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  How To Get Gap Insurance in California

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  FAQs

What Is California Gap Insurance?

Gap coverage refers to either a car insurance add-on or a loan agreement that can step in if your car is declared a total loss and its ACV is less than the amount you still owe your lender. A vehicle’s ACV is how much it is worth after taking depreciation factors — like mileage or wear and tear — into account.

Guaranteed asset protection products are available through both auto insurance companies and other types of financial institutions, like banks, credit unions and car dealerships.

Not everyone needs gap insurance coverage, but it may be beneficial if you did any of the following:^[1]

• Made a down payment of less than 20% of the value of your car
• Financed your vehicle purchase across a period of five years or more
• Leased your car rather than buying it outright
• Bought a type of car that depreciates exceptionally quickly
• Rolled over negative equity from a previous auto loan into your current loan

Is Gap Insurance Required in California?

California drivers are not required by law to purchase gap insurance or enter into a similar agreement known as a gap waiver. In fact, lenders and dealers in California are not allowed to require gap waivers as a condition for financing, nor can they consider your decision not to purchase a gap waiver when setting the terms of a financing contract.^[2]

In addition, a financial institution in California is not allowed to sell you a gap waiver at all if you take out a loan for less than 70% of the retail price of the vehicle you are buying.^[2] Keep in mind that you may not be able to purchase a new gap insurance policy if your car is more than three model years old, and you may need comprehensive and collision coverage to qualify for gap insurance.^[3][4]

How Does Gap Insurance Work in California?

While you can get gap insurance through a traditional insurance company as an add-on to your car insurance policy, a gap waiver is a similar coverage type that is usually sold by auto dealerships and lenders in California. When you pay for a gap waiver, your lender agrees to reduce or cancel your outstanding debt if your car is totaled and your insurance payout is not enough to finish paying off your loan.^[5]

Whether you opt for an insurance endorsement or a waiver, gap coverage is most useful if you have a new vehicle rather than an older, used car. New cars generally depreciate in value by 20% within one year and by 60% within five years.^[6] As a result, it’s more likely that your loan balance will exceed your car’s ACV at times if you buy new rather than used — especially if you made a low down payment or financed over a period of several years.

California Gap Insurance Laws

The California State Legislature regulates the sale of gap waivers in multiple ways. For example, state law mandates that anyone who buys a gap waiver must be able to cancel it without having to pay a penalty. You are entitled to a full refund if you cancel within 30 days of purchasing a gap waiver, while you are entitled to a prorated refund if you cancel after the 30-day mark.^[2]

Is Gap Car Insurance Taxable in California?

Gap auto insurance is not taxable in California because California’s sales tax generally applies only to the purchase of tangible property. For this reason, the amount of money you spend on services and other “intangible goods” — such as insurance, health care and education — is not subject to taxation.^[7]

Are There Limits on Gap Insurance in California?

Coverage limits may apply to a gap waiver you purchase from a dealership or financial institution in California. However, your lender must let you know up front if your gap waiver’s coverage limit is lower than the loan-to-value ratio of your vehicle sale contract — which measures the amount of money financed as a percentage of the value of the car.^[2]

What Does California Gap Insurance Cover?

If your vehicle is declared a total loss, gap insurance covers the difference between its ACV and the remaining balance on your auto loan. While your physical damage coverage pays out the ACV of your car after it is stolen or irreparably damaged, this may not be enough to finish paying back your lender if your car has depreciated more quickly than you have made loan payments — in which case you would need gap insurance to cover the outstanding amount.

For example, suppose you have a $1,000 collision deductible, your car is worth $20,000 and you owe $25,000 on your car loan. If your car is totaled in an accident, your collision insurance will pay out $19,000 — your car’s ACV minus your deductible — while your gap insurance will pay out the $5,000 difference between your car’s ACV and your loan balance. This allows you to fully repay your loan, and the only thing you’ll have to pay out of pocket is your deductible.

Although gap insurance won’t pay to buy you a new car, it can at least keep you from having to pay off separate loans for both a vehicle you no longer have and its replacement. Keep in mind that this coverage type only applies if your vehicle can no longer be driven, meaning it won’t help you pay off your auto loan if your car incurs damage that can be fixed at a reasonable price.

How Much Does Gap Insurance Cost in California?

Usually, gap insurance costs around $20 per year as an auto insurance endorsement.^[1] However, the premium is often higher if you go through an alternative financial institution. For example, California residents with ties to the United States military can get gap insurance from Navy Federal Credit Union for a one-time payment of $499 — which comes out to about $100 per year for a five-year loan.^[8]

If you buy a gap waiver, California law dictates that it cannot cost more than 4% of the value of your loan.^[2] For example, if you take out a $40,000 loan to finance your car, the maximum amount your lender can charge you for a gap waiver is $1,600. When you get gap coverage from a lender, you may have the option to roll the premium into your loan and finance it over a multiyear period.

This can help you avoid paying a large lump sum up front, but you’ll have to pay interest on a financed gap insurance premium, increasing your costs in the long run.^[9]

Companies That Offer Gap Insurance in California

Below are some examples of car insurance companies that operate in California and offer gap insurance coverage:

• Allstate
• Farmers
• The Hartford
• Nationwide
• Travelers

Of course, you should also be able to purchase gap coverage from several different banks or dealerships in California. Though gap insurance from one of these financial institutions may cost more, it may also cover part or all of your collision or comprehensive insurance deductible, which likely won’t be covered by gap insurance from a traditional insurance carrier.^[8]

How To Get Gap Insurance in California

The first step in finding gap insurance in California should be acquiring quotes from three to five different insurance providers to figure out which one can offer you the most affordable coverage. That said, contacting insurers individually and giving them the same information over and over again can be a time-consuming and tedious process.

To simplify the process, you can take advantage of an online insurance marketplace, like SmartFinancial. Fill out our online questionnaire once, and we’ll direct you toward an insurance agent who can help you find a policy that includes gap insurance and matches your other coverage needs. Click here to enter your ZIP code and start comparing auto insurance quotes for free.