Do you want to pay for a car that’s been totaled? Probably not. But that could happen if you don’t have gap coverage as part of your auto policy. If you owe more on your car than its current value, gap insurance helps “bridge the gap” in the case of a total loss. That way you don’t end up paying thousands of dollars on a car that you no longer have. Let’s look at what gap coverage is, how it works, who needs it, and how to get the right gap coverage policy for you.
What is gap coverage?
Gap insurance helps cover the difference between what your vehicle is worth at the time of a total covered comprehensive or collision loss and how much you owe on your car loan or lease. Here’s how it works.
How does gap coverage work?
You may already be familiar with collision and comprehensive coverage. Collision helps cover costs to repair or replace your vehicle if it is damaged in a collision with another car or a stationary object. Comprehensive insurance can cover damage or loss arising from events such as certain natural disasters, theft, vandalism, fire, civil commotions, terrorism, or animal impact. Both collision and comprehensive insurance only cover your vehicle up to the current actual cash value (ACV) of the car. This means that you could be reimbursed the current value of your car at the time of a loss, up to the policy limits.
Consider this scenario: you have comprehensive coverage with a $1,000 deductible. Your car is stolen and at the time of loss, you have a $20,000 loan out on it. The actual cash value of the car is $15,000. This happens frequently since cars start depreciating the moment they’re driven off the lot. It’s not uncommon to owe more on a loan than the vehicle is worth.
In this situation, your comprehensive coverage would only cover up to $15,000, less the $1,000 deductible for a total of up to $14,000.
You got $14,000 from your insurance company, but you still owe $20,000 to your lender. That means you would still owe $6,000 out of pocket for a car that you no longer possess.
That’s where gap insurance comes in. If you have gap coverage, it will help bridge that $6,000 gap between what your comprehensive coverage will pay and the amount you still owe to your lender, up to the gap coverage limits.
Is gap insurance included on a typical auto policy?
Gap insurance is not usually part of a typical auto policy. It’s an optional coverage to add to a vehicle with comprehensive or collision car insurance.
Do I need gap coverage?
Gap coverage is recommended for anyone who:
- Is currently leasing a car, or
- Owes more on a car loan than the car is currently worth, and/or
- Is required to hold gap insurance by their car lender or lease provider.
You may not need gap coverage if you:
- Own your car outright, or
- Do not have a car loan or lease, or
- The remainder of your car loan is less than the current value of the vehicle.
No matter your situation, it’s worth talking with your insurance provider to see if gap coverage is a good option for you.
What does gap coverage not cover?
Gap insurance usually does not cover:
- Your car insurance deductible
- Overdue payments or late fees on a car loan or lease
- Carry-over balances from previous loans or leases
- Lease penalties (i.e., high mileage, excessive use)
- Credit insurance linked to the loan
- The original purchase value of your car (it only fills in the gap of what is leftover on your loan)
- Repairs to your car
- Down payment on a new car
Where can I buy gap insurance?
Not all auto insurance companies will offer gap insurance and it isn’t available in every state. However, if it’s possible, we recommend you consider adding gap insurance to your auto policy.
Many car lenders or dealerships will try to sell you gap insurance policies for a flat rate. Buying gap insurance from a dealer may cost more, you may have to pay interest on it, and it will likely be tied to your loan (so you can’t cancel the insurance if you no longer need it). Check with an InsuraMatch Licensed Advisor before deciding on gap coverage from a car dealer.
Do you need gap coverage?
No one can predict what’s going to happen. If one bad day your car gets totaled or stolen, make sure you have gap insurance there to have your back. Don’t end up paying thousands of dollars on a car you can no longer drive! Chat with one of our Licensed Advisors today to see if gap coverage is right for you.