Gap Insurance: When It's Needed

GAP insurance, or guaranteed asset protection, covers the difference between the actual cash value of a vehicle and the amount still owed on a loan or lease in the event of theft or total loss. GAP insurance is optional and can be purchased from car insurers or dealers. It typically takes 5-45 days for GAP insurance to pay out after a claim is filed, depending on the complexity of the claim and state regulations.

When a car is deemed a total loss

If your car is deemed a total loss, your insurance company will pay you the actual cash value (ACV) of your car, minus your deductible. This is where gap insurance comes in. Gap insurance, or guaranteed asset protection, is an optional coverage that pays the difference between what your vehicle is worth and how much you owe on your car loan at the time it's stolen or totalled.

Gap insurance is designed to pay the remaining loan amount so that you don't owe money on a totalled car. For example, if you owe $25,000 on your loan and your car is only worth $20,000, your gap coverage will cover the $5,000 gap, minus your deductible.

Gap insurance is optional and not required by any state as part of your car insurance policy. It is typically only needed if you have negative equity in your car, meaning you owe more than the vehicle's value. If you have paid off your car loan or own your car outright, you don't need gap insurance.

Gap insurance will also not cover overdue lease or loan payments, costs for extended warranties, credit life insurance or other insurance purchased with the loan or lease, carry-over balances from previous loans or leases, financial penalties imposed under a lease for excessive use, security deposits not refunded by the lessor, amounts deducted by the primary insurer for wear and tear, prior damage, towing and storage, or equipment added to the car by the buyer.

Additionally, gap insurance does not cover mechanical issues such as engine or transmission failures, or any other car problems that are not losses covered by your car insurance policy.

When a car is stolen

If your car is stolen, gap insurance can be a very useful form of coverage. Gap insurance covers the difference between the actual cash value (ACV) of your vehicle and the amount you still owe on your loan or lease. This is particularly important if your car is stolen and not recovered, as you will be left without a vehicle and may still have a loan to pay off.

In the event of a car theft, you should first report the incident to the police and file a report. Be sure to get a copy of the police report, as you will need to submit this when filing an insurance claim. You should then notify your auto insurance company of the theft and inquire about filing a claim for a payout if you have comprehensive coverage. It is important to act quickly, as there may be a waiting period in case the vehicle is recovered.

After filing a claim with your auto insurance, you will then need to file a claim with your gap insurance provider and submit all requested documentation. This may include a copy of the police report and details of your loan or lease agreement. Keep in mind that your gap insurance claim may not be settled until your auto insurance company has made a final decision on your comprehensive coverage claim.

While waiting for a determination on your claims, it is important to continue making your loan payments to avoid any negative impact on your credit score. Gap insurance can help protect you from having an outstanding loan balance if your vehicle is stolen, but it is important to review the terms and conditions of your specific policy to understand the coverage limits and any exclusions.

In summary, if your car is stolen, gap insurance can provide valuable financial protection by covering the difference between the insurance settlement and the remaining balance on your loan or lease. However, it is important to act quickly and provide all necessary documentation to ensure a smooth claims process.

When you owe more than the car is worth

If you owe more on your car than it's worth, gap insurance can be a good idea to protect you from financial loss. This type of insurance covers the "gap" between the depreciated value of your car and the loan amount you still owe if your car is involved in an accident, stolen, or totaled.

For example, if you owe $25,000 on your loan and your car is only worth $20,000, gap insurance will cover the $5,000 difference, minus your deductible. This can save you from having to pay off the remaining loan amount out of pocket.

Gap insurance is especially important if you made a small down payment (less than 20%) on your car or if you have a long loan term (over 60 months). In these cases, you may owe more on your car than it's worth for a significant portion of your loan term.

You can purchase gap insurance from your car insurance company or from your car dealer or bank. However, it's important to note that gap insurance products offered by car dealers or banks may not be actual insurance policies, and they may be more expensive than those offered by insurance companies.

To determine if you need gap insurance, compare your loan balance to the current value of your car using a guide like the National Automobile Dealers Association (NADA) guide or Kelley Blue Book. If you owe more than your car is worth, consider purchasing gap insurance to protect yourself financially.

When you lease a car

Gap insurance is particularly useful when leasing a car because leased cars depreciate quickly. It can be especially beneficial if you make a low down payment, have a long lease term, or are leasing a luxury car.

Some lessors require customers to purchase gap insurance for leased vehicles. This helps the customer pay the difference if something happens to the car, while also providing the lessor with financial security if the customer can't afford to pay the balance. Check your lease agreement to see if gap insurance is required for you.

Even if you aren't required to have gap coverage, it can still be a good idea to get it. This is because, without gap insurance, you may end up owing more on your car than it's worth. For example, if you lease a car with no money down and choose a long payoff period, you may owe more than the car's current value. In this case, if your car is written off, standard car insurance will only pay up to the car's current value, which may be less than the outstanding lease amount. Gap insurance will cover this difference, ensuring you don't have to pay out of pocket to make up the shortfall.

When you have a longer financing term

Gap insurance is an optional auto insurance coverage that applies if your car is stolen or deemed a total loss. It covers the difference between the vehicle's actual cash value and the amount you still owe on your loan or lease. It is designed to protect you from depreciation, which can leave a gap between what you owe and the car's value. This gap can be significant if you have a longer financing term, as the longer your vehicle is financed, the higher your chance of owing more on the vehicle than it is worth.

When considering gap insurance for a longer financing term, it is important to keep the following in mind:

• The cost of gap insurance: The cost of gap insurance varies by insurer and can be added to your car insurance policy or purchased separately from the dealer. Buying gap insurance through your auto insurer is usually a cheaper option. According to Forbes Advisor's analysis, the average cost of gap insurance is $61 per year.
• The duration of gap insurance: Gap insurance is typically added to your car insurance policy and lasts for the duration of the policy. However, it is not necessary to keep gap insurance for the entire length of the loan. Once the amount you owe on the vehicle is less than or equal to the car's value, there is no longer a need for gap insurance coverage.
• The benefits of gap insurance: Gap insurance can provide valuable protection if you have a longer financing term and owe more on your vehicle than it is worth. It can help bridge the gap between the amount reimbursed by your car insurance and the amount you still owe on your loan or lease.
• The limitations of gap insurance: It is important to note that gap insurance does not cover all expenses related to your vehicle. It does not cover your car insurance deductible, overdue payments, late fees, extended warranties, lease penalties, or charges for credit insurance connected to the loan. Additionally, gap insurance only covers total loss or theft of your vehicle and does not cover engine or transmission failure, or any other mechanical repairs.

In summary, if you have a longer financing term, gap insurance can provide valuable protection against depreciation and the risk of owing more on your vehicle than it is worth. However, it is important to consider the cost, duration, benefits, and limitations of gap insurance before deciding if it is the right option for your specific situation.

Frequently asked questions