If you have leased or financed your car, gap insurance is an optional auto insurance coverage that provides protection against the difference of what you owe on your vehicle and its cash value in case it gets damaged or totaled. This valuable option can be purchased to protect yourself and provide peace-of-mind.
- Depending on the terms of your loan, you might have a car accident while upside down in which case gap insurance will help to pay for any damages and make up the difference.
- In most states, gap insurance is not required as part of your car insurance policy. However, it may be optional coverage.
- It is important to purchase gap insurance, even if you financed your car or leased it. Gap insurance protects against the cost of a stolen vehicle.
What is gap insurance?
If your vehicle has been totaled by a covered peril, such as an accident, theft, fire or flood and is no longer drivable or operable due to the damage caused by the covered peril-you will receive only what it would cost you to replace that car with another similar make and model. This amount is often considerably less than what you still owe on your loan for the vehicle (in case of loans) or how much you are required to pay out for a lease payoff.
This can happen when the amount of your actual cash value (ACV) payout is less than what you owe on your lease or loan. If this happens, you will be reimbursed for the difference. This way, you are protected from any unplanned financial shortfall that would occur in future if anything happened to harm the vehicle beyond repairing it and its contents while providing peace of mind for a reliable car purchase with no worries about gaps owed in case something goes wrong.
Gap insurance What does cover It ?
If your car is stolen or totaled, gap insurance will pay the difference between the ACV of your vehicle and what you still owe on it. It might also cover a deductible for any regular car insurance policies you have in place – if they qualify.
Most car owners think that they will be able to get the same or still owe what they borrowed after their car is totaled. This is not so as gap insurance has been offered by some of these companies and covers areas like replacing your vehicle with equivalent value when it’s totaled, compensating for any loan/lease payments you may have missed out on after getting a new car, and covering other losses related to your auto such as renting another one while yours is being repaired or stolen.
Gap auto insurance When isn’t covered ?
Gap insurance typically doesn’t pay for things like theft, fire and loss of use.
- Payments on rental property that are due and not paid by the agreed upon date.
- Output: Paying overdue rent for rented/leased property.
- Insurance costs can vary depending on the type of insurance you want.
- The car was purchased with the loan or lease program.
- Carry-over balances are loans or leases that you have not paid off.
- Financial penalties are imposed for excessive use.
- The lessor was unable to refund security deposits in a timely manner.
- Amounts deducted by the primary insurer where damage was sustained to the vehicle before or after it left his possession..
- Some of the equipment on a new car may be added by the buyer. These are not covered under warranty.
- A mechanical issue, such as engine or transmission failure, is a car problem that isn’t covered by your auto insurance policy.
Gap insurance Does cover theft?
Yes, car insurance will help pay out when your vehicle is stolen and not found. When you apply with your comprehensive insurance to cover theft, they in turn work together to insure the loss of a vehicle up until its actual cash value – minus any deductible you may set. This would reduce monthly auto loan payments by that amount depending on what kind of coverage you need as well.
How does gap cover work?
Let’s look at some ways you can protect yourself.
When a number is added to another number, the result will be a gap.
- You purchase a car for $25,000. It drives off the lot with its engine running smoothly and you are able to drive it home.
- After paying the down payment, you will owe $24,000 in car payments over five years. Because these are 0% interest loans, there is no monthly fee for long-term financing.
- You would purchase comprehensive and collision coverage for a $500 deductible, giving you the necessary protection against damage or property loss.
- If you have an accident while still upside down on your loan or lease (you owe more than the car is worth), it’s a total loss.
- The insurance company determines that the car is worth $22,000 but you still owe $23,500. The difference in value between your car and the amount of money owed is due to maintenance costs.
- A gap insurance policy should pay the difference and your deductible, totaling two thousand dollars.
These are the items listed:
- To reduce the amount owed on your loan, you repay it during a time of accident. The payoff is $23,500.
- The vehicle’s actual value at the time of accident is $22,000.
- Your deductible is $500.
- This policy will pay out $22,000 for physical damage that is not more than a deductible of $500.
- Gap insurance is a type of coverage that pays the difference between what you owe and what your auto policy will pay (plus your deductible). Gap insurance would cover $2,000 in total damage.
Difference between a lease or loan coverage and gap coverage?
While loan/lease coverage and gap insurance are often used interchangeably, they aren’t quite the same. Loan/lease coverage will pay for the difference between what you still owe on a vehicle if it is totaled or Stolen while gap insurance pays out, instead of cash value.
Lease/loan coverages typically have limitations on how much they will pay. Many insurance companies offer coverage for only a certain percentage of the value, such as 25%. However, both are minus your deductible- leaving you with a net loss if this is not paid for and you damage the car in an accident or it gets stolen.
The car is worth $18,500. The owner owes $25,000 on it and has a total of just over $6,500 in damages from a recent accident. The difference between what they owe and the value of their vehicle ($6,500) can be covered with gap insurance or lease/loan coverage, however only one option would cover all the money that was lost: gap insurance pays out this full amount of damage for less than your regular deductible because it covers both upfront expenses (such as collision protection deductible) plus any remaining loss after your deductible is paid up to 100%.
In contrast to the aforementioned options which will only pay up 25% over what you owe if everything else fails then leasing or loan coverage would still end up owing them an extra 1-2 thousand dollars. So the plan won’t work either.
To make sure lease/loan coverage is right for you, run the numbers. For instance, if in our example above the vehicle was worth $20,000 then 25% of its value is equal to $5,000 and that’s also just enough to cover out-of-pocket costs ($25,000 due – $20,000 paid by insurer and your deductible =$50000). That means we’re all good!
Say you bought a car for $40,000 and it depreciated to $25,500 in value over time. You would get the 25% more than actual cash value of your car which is worth $31K minus the deductible after it’s declared a total loss.
Do I need a gap insurance?
If you financed or leased your car, gap insurance may be a wise investment. If you own a car, you should make sure to buy gap insurance. This type of coverage helps if your vehicle is totaled before the term of your loan, which could void your contract with a bank or car dealership and cause serious financial trouble.
Here’s why gap insurance is necessary:
Many car owners don’t take into account the depreciation of a new vehicle. Within minutes of driving off the lot, you can be missing 10% to 20% on your purchase price despite buying full coverage. If you own a car for three days and it is destroyed, the cost of purchasing full coverage can be around 10%-20% of what your car was worth.
Using CarFax reporting on current depreciation rates, new cars will be worth less than 50% of their original value within the first three months. After that period, they lose about 10% in value annually.
This means that new cars depreciate by as much as 50% over 5 years. The payoff for the value of a car is likely to be lower than what you owe at least in the first few years.
If you buy a car outright, there is no need to purchase gap insurance since it’s not needed.
If you do not have loans that are attached to your car, then there is no need for gap insurance coverage. If the value of your vehicle has decreased, then. you don’t owe anything more than what it’s worth right now and so cannot be compensated by paying out on this insurance policy.
If you pay a large down payment on your mortgage, is the possibility that you could run into financial trouble before your loan is paid off enough of a risk for gap insurance?
If you have a good down payment, don’t let your vehicle depreciate too quickly and make sure to pay the loan off each month, then you typically won’t need gap insurance.
Gap car insurance makes sense if you have negative equity in your vehicle. This policy will pay the outstanding loan balance owed on the car after it was deemed to be a total loss by an insurer.
What gap insurance necessary and required by law?
While it is not required by any state as part of your car insurance policy, gap coverage is necessary if you owe more on a vehicle than its value.
Gap insurance is optional coverage, but it’s not uncommon for the lease contract to include this in the agreement. Sometimes these types of policies are called auto loan/lease coverage and loan/lease payoff coverage.
If you purchase a car from a dealership that requires you to carry gap coverage, then there is no need for the dealer to charge more money.
Some financial institutions may want you to have gap coverage as part of your auto insurance policy on the car you’re purchasing.
You should have the right to decline gap insurance as a way of protecting yourself from being charged for something you cannot afford.
For example, the California Car Buyer’s Bill of Rights requires disclosure about the prices of Common items that are packed into a loan include theft etching on windows and other car parts. It also requires gap insurance or extended service contracts to be disclosed too!
Remember to ask your car dealer if they provide an itemized price list of all these items, such as warranties and insurance.
If you have a charge for gap insurance from your lender and don’t have this coverage, discuss the matter with that company first. Unless you signed paperwork stating that you would add gap insurance to the car at the time of purchase as part of your finance or purchase agreement, in which case it should be no problem getting a refund on them.
If you are struggling with trying to remove the gap coverage on your car and don’t want to pay for additional insurance, contact your state’s consumer division.
Does gap insurance always benefit you?
Gusner explains that, as long as the total loss claim is not denied by the insurance company, a gap insurance policy will be able to pay out. The amount taken from your paycheck will be the gap insurance payment, minus the car payments that have been missed.
If your gap insurance does not pay out on time, this is a good time to research different options.
If your car is totaled or stolen and you believe the claim was denied because of some reason, such as a lapse in coverage. It also wouldn’t cover insured vehicles with less than $100k worth of damages.
Injuries: Gap insurance doesn’t cover medical bills related to bodily injury you cause in an accident with someone else. Personal injury protection or MedPay would pay for your own injuries and the other driver’s liability insurance could also help them if they have it.
Property destruction is caused by you: Damage you do to another car or someone else’s property would not be covered by a gap insurance — your property damage liability would.
Damage to your car that isn’t your fault and doesn’t equal a total loss.
If your car sustains serious damage, gap insurance will only cover it if the car is deemed a total loss and you can no longer drive it. If another driver’s property damage liability covers damages to your vehicle because of their fault, collision insurance does too. Or in that case, gap insurance wouldn’t be necessary for this reason!
Can my gap insurance cover any deductible for a car accident?
It is difficult to answer this question without knowing exactly what your car insurance policy includes. Some policies will pay the deductible and some won’t, but whichever one you choose, it’s not actually reimbursed back to you. Rather, the deductible amounts are subtracted from any potential payout of your totaled vehicle and then covered as part of a loan balance that car insurance pays for.
Do You need to know about gap insurance for my car?
There are many places to buy gap insurance for cars:
The bank or financial institution that loaned you the money to buy your car.
You purchased your car at the dealership where you had it built.
Your car insurance company is an entity which offers a range of services to those who own and use cars. If your vehicle gets damaged or destroyed, then it can be replaced at little cost.
This company offers stand-alone gap insurance policies.
It’s important to know your coverage options when purchasing a new home.
Yes, you can get gap insurance without primary insurance.
You need to have a standard auto insurance policy in order to get full coverage on your vehicle. Because you must have minimum auto coverage, that means your state law requires you to get stand-alone gap insurance. If this is the case, make sure to buy a policy from an insurer who offers one of these policies! gap insurance, you must still have your state’s minimum auto insurance coverage. That is the required type of coverage for driving legally.
Is it possible to purchase gap insurance on a used vehicle?
Yes, in most cases you can. State laws and insurance policies vary on the issue of gap coverage, but there are many used car financing options available. It’s beneficial when the value of a vehicle depreciates while you still owe money on the loan or lease.
Is gap insurance acceptable when you are trying to make a claim on your car?
There is no recognized gap policy by any Department of Motor Vehicles as proof of insurance. It does not prove that the driver has financial responsibility to register or renew registration on their vehicle, which is why it doesn’t go well with DMV requirements.
Although mandatory car insurance covers the state-mandated liability coverage that police want to verify, it doesn’t provide a gap or stolen recovery coverage. Gap and stolen recovery are optional coverages provided by most auto insurers but they only help you in a total loss situation, not while driving on public roads.
Getting gap insurance for a loan on something other than a car is not possible.
You cannot use a credit card to pay off other loans. Credit cards are only meant for financing vehicles, so they don’t work with mortgages, balloon payments or any other non-vehicle specific types of loans like this one.
If you used your Home Equity Line of Credit (HELOC) to purchase a vehicle, gap insurance would not cover this type of loan because the HELOC is meant for another purpose.
Gap coverage is only available when you have an auto loan or lease from a conventional source.
Can a loan from an individual be covered by the insurance?
People who use a gap policy will only have coverage if they have taken out their loans through the company.
In a bank or finance company, the gap insurance carrier has more certainty that they’re getting their money’s worth. With private party loans, it is hard to be certain what you’re getting into – where all of the paperwork was completed and payments were made properly. That is why with this type of loan, an insurer may not give them their full support as well since there are so many unknowns about how everything will go down.
Gap insurance is a good option for people who have not purchased the car outright. If you have an auto loan or lease, gap insurance can help you get back on your feet in case of a total loss. This type of policy pays off the difference between what your car is worth and what you still owe on it at the time of a total loss.
You may be wondering if gap insurance is a good idea. You should remember that there are some limitations and exclusions in the policy, so you must check with your auto insurer to see if it’s included as part of their standard coverage or an optional add-on.