Gap Insurance And Deductibles: Understanding Auto Loan Coverage

Gap insurance is an optional auto insurance coverage that applies if your car is stolen or deemed a total loss. When your loan amount is more than your vehicle is worth, gap insurance coverage pays the difference, minus your deductible. For example, if you owe $25,000 on your loan and your car is only worth $20,000, your gap coverage covers the $5,000 gap, minus your deductible.

Does gap insurance cover theft?

Yes, gap insurance covers theft—but only in certain circumstances. If your car is stolen and deemed unrecoverable, or if it is recovered but has sustained enough damage to total it, then gap insurance will pay for the difference between the car's actual cash value (ACV) and the auto loan or lease balance.

Gap insurance companies usually require a waiting period of around 30 days before a stolen car can be deemed impossible to recover. After this waiting period, most gap insurance companies will ask for a copy of the police report detailing the theft before agreeing to pay for a claim.

If your car is recovered after being stolen, gap insurance will only pay out if the car is considered "totalled". Each state has different rules on what constitutes a total loss, based on the estimated price of repairs compared to the car's value.

To receive a gap insurance payout for a stolen car, you will need to get a copy of the police report, file a claim with your standard insurer, and then file a claim with your gap insurance provider. Gap insurance companies thoroughly investigate claims for stolen cars to prevent fraud, so expect a wait before receiving a payout.

Does gap insurance cover engine failure?

Gap insurance does not cover engine failure. It only covers the difference between an auto loan or lease balance and the vehicle's value if the car is totaled in an event covered by comprehensive or collision insurance, or by the at-fault driver's liability insurance. Engine damage from a crash or a covered event could contribute to the "totaled" designation, so gap insurance could indirectly cover engine failure, but only if that's not the only issue.

If you're looking for car insurance that covers engine problems unrelated to an accident or comprehensive claim, you'll need to purchase specialized coverage like mechanical breakdown insurance or an extended warranty.

Does gap insurance cover death?

No, gap insurance does not cover death. It is designed to cover the difference between a car's value and any remaining auto loan or lease balance if the car is declared a total loss. This type of insurance does not cover medical bills, funeral costs, or car payments if the policyholder, a passenger, or another driver dies.

Gap insurance will make car payments if the car is totalled due to theft or an accident, but not if the owner is simply unable to pay. If a car owner dies, any co-signers or joint owners of the car will become responsible for the car payments. If there are no co-signers or joint owners, the car will become part of the deceased's estate, and the executor or administrator of the estate will determine whether the estate can afford to continue paying the car loan or if the car will have to be repossessed by the lender.

While gap insurance does not cover death, there are other types of insurance that do. These include liability coverage, personal injury protection (PIP), uninsured motorist coverage, and MedPay insurance, all of which include death benefits in certain situations. For example, if you are at fault in a car accident that kills another person, your bodily injury liability coverage will pay for their medical or funeral expenses up to your policy limits. Similarly, PIP, which covers injuries sustained regardless of fault, includes death benefits that may pay for funeral expenses, medical bills, and loss of income. Uninsured motorist coverage and MedPay usually cover funeral expenses as well.

Does gap insurance cover negative equity?

Gap insurance covers negative equity on a car finance deal if you owe more than the car is worth at the time of write-off. However, this only applies to negative equity caused by depreciation. If you want to cover negative equity carried over from a previous contract, you may need to buy an extra policy.

Negative equity occurs when you owe more to the leasing or car finance provider than the car is worth. This is common in car finance deals because of depreciation. For most of the time that you are making payments, you will owe more than the car is currently worth as the car is losing value faster than you are repaying the loan.

If you write off your car or it is stolen, your car insurer will only pay out the car's current market value, which could leave you still owing money to the finance provider. Gap insurance will pay off this outstanding finance so that you won't be left out of pocket.

However, while gap insurance covers negative equity caused by depreciation, it typically does not cover negative equity carried over from a previous finance agreement. If you want to cover this type of negative equity, you may need to take out a specialist policy or buy an optional add-on from your gap insurance provider.

Does gap insurance cover your deductible?

Gap insurance, or guaranteed asset protection, is an optional form of auto insurance that covers the difference between the amount still owed on a car loan and the current value of the car in the event of a total loss. This can occur when a car is stolen or involved in an accident and subsequently declared a total loss.

However, gap insurance does not cover your insurance deductible. This is the amount your insurance company subtracts from a claim payout. For example, if the gap reimbursement amount is $4,000 and your deductible is $500, the total reimbursement amount would be $3,500.

Gap insurance is typically purchased from an auto insurer, but it can also be bought through a dealership or lender and rolled into loan payments. It is generally only available for newer cars, with a maximum age limit that varies by insurer.

Frequently asked questions