GAP Insurance: What is and Who Needs it.

gapcoversSome drivers assume comprehensive and collision coverage offers full protection if their car is stolen or totaled. But if they’re financing or leasing a new car and experience a total loss, they could be in for a rude awakening. Gap insurance (guaranteed auto protection) may be the most important car insurance coverage you’ve never heard of.

a total loss

Imagine you just purchased a new car with a sticker price of $30,000. You put $1,000 down, leaving you with $29,000 to pay over the coming years. You wisely buy comprehensive and collision coverage with a $500 deductible.

Unfortunately, a couple months later, your car gets totaled in an accident.

You file a claim. Your car insurance company informs you they’ll disburse a payment of $22,000 to cover your car’s actual cash value. You breathe a sigh of relief before looking at your latest loan statement … and gasp when you see that you still owe $28,000 on your car! That leaves $6,000 — plus your $500 deductible — for you to cover out-of-pocket, assuming you don’t want to retain salvage (i.e., retain ownership of your totaled car). If you do retain salvage, the salvage value will also be deducted from the payout.

enter gap insurance

Gap insurance covers the difference between what you owe on your car and what your car insurance company is willing to pay for it — without any maximum payout stipulation. If you financed a new car, chances are this gap will linger for a couple of years, leaving you responsible for the difference in the event of a total loss. Eventually the difference in these totals will vanish, but in the meantime, gap coverage protects you from having to cover the difference.

It’s worth mentioning that, in most cases, you can only use gap insurance if you’ve purchased comprehensive and collision coverage. Review your policy’s declarations to get an understanding of these coverages.

where can i get gap insurance and what does it cost?

If you don’t already have gap insurance, check online as most insurers offer this coverage or a variant called loan/lease coverage. Gap coverage usually costs a few extra dollars a month, but rates can vary significantly from one insurer to another.

Alternatively, you can purchase gap insurance at your dealership, though this is likely to cost you significantly more. Many dealerships sell gap insurance coverage for an average of $500 to $1,000, and they often require a large payment upfront.

getting — and getting rid of — gap insurance

If you’re the proud new owner of a financed car, take a moment to check your car’s actual cash value using the NADA Guides, then compare that value to your loan balance. If you owe more than the car’s worth, we suggest contacting your car insurance company to add gap insurance or loan/lease coverage to your current policy. It’ll add a few more dollars to your monthly or biannual payment, but it could potentially save you thousands.

Once you have gap insurance, monitor your car’s changes in value (depreciation tends to slow after the first few years of ownership) and your decreasing loan balance. As soon as you’re no longer “upside down” — i.e., you owe less than your car is worth — you can remove your gap or loan/lease coverage. Many car insurance companies will alert you when you no longer need this coverage, but it pays to keep track yourself.

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Compare Multiple Quotes and Save Hundreds!

You may be leaving hundreds of dollars on the table if you don’t compare GAP insurance quotes directly from one or more of the top insurance companies because rates can vary significantly from one insurer to another. Alternatively, you can purchase gap insurance at your dealership, though this is likely to cost you significantly more. Many dealerships sell gap insurance coverage for an average of $500 to $1,500, and they often require a large payment upfront. To see how much you can save today, enter your zip code above and get free quotes from one or more of the top carriers that provides the cheapest GAP insurance coverage in your area.

Car owners often assume that if their car is totaled, it will be replaced at the amount they paid, or at least the amount they owe, by their car insurance company. This is not always so.

Most car insurance policies will pay only up to the actual cash value of the car — what it was worth right before the accident. That will almost certainly be less than you paid, and in many cases it can be less than you owe. Negative equity has become more common as auto loans have lengthened to 60 months, 72 months and even longer. Cars depreciate more rapidly than the loan balance shrinks, leaving owners “upside down” in their cars — and on the hook if the car is totaled.

Many car insurance companies offer gap insurance (sometimes called loan/lease gap, or LLG) so that if you have negative equity in your vehicle when it is totaled, you’re not left owing money to your lien holder. Many car dealers and banks will offer you the coverage as well, but it’s typically much cheaper to buy it from your insurance company.

Gap insurance is not required by law. Lenders will usually require gap insurance on their lease contracts, but it’s less common for them to ask for it on loans. The dealer cannot require it (unless, of course, it is also the lender.)

Buy gap insurance if you have a long loan or a small down payment. If you have both, it’s an absolute must.

How does gap insurance work?

Gap insurance pays the difference between the actual cash value (ACV) of your vehicle and the current outstanding balance on your loan or lease — but only if you owe more than the value of the car and it’s been declared a total loss. Sometimes it will also pay your regular insurance deductible.

gapcoversIf your insurance company totals your vehicle, your physical damage coverages should pay for the car’s actual cash value. If the ACV is less than you still owe on your loan or the amount due for a lease payoff, the shortfall is the “gap” your gap insurance would pay.

For example, say you’ve totaled your car and your loan payoff at the time of the accident is $23,500. The insurance company finds your vehicle’s ACV to be $22,000, and you have a $500 deductible. This means your insurance company pays your lien holder only $21,500, leaving you to pay the remaining $2,000. If you have gap insurance, it would pay that $2,000 difference for you.

Do I need full coverage to get gap insurance?

Yes, you need to have not only state-mandated bodily injury and property damage liability coverages on your car, but also the physical damage coverages of collision and comprehensive on your car to buy gap insurance. Gap insurance providers require that you have physical damage coverages on your car, since those are the coverages that will pay out the actual cash value (ACV) of your vehicle if it is totaled out.

Gap insurance pays only the difference between the ACV and the balance of your loan or lease payoff. So if you don’t have collision or comprehensive to pay off the ACV, your gap insurance will not normally pay out after the total loss of your car.

Does gap insurance come with a deductible?

No, gap insurance does not usually have a deductible.

Does a gap insurance policy have a maximum payout or other limitations?

Most gap policies cover loans only up to a certain threshold, usually $100,000, and the maximum loss is typically capped as well, often at $50,000. The most common exclusions for a gap insurance policy or payout include:

Original loan amounts that exceed 120 percent of MSRP (new vehicle) or NADA retail value (used vehicles), plus 30 percent of value allowable for additional financed items like credit life or service contracts.
Late charges or other penalties due to your lender.
Loan terms greater than 84 months.
A balloon payment at the end of the term.
How long do I have to buy gap insurance after I buy a vehicle?
Gap insurance typically is available on new, used and refinanced cars, trucks and SUVs leased, purchased or refinanced within the past 12 months. So, if you know after buying, leasing or refinancing of a vehicle that you owe more than its actual cash value (ACV), then gap insurance could be beneficial to you.

Does gap insurance cover repairs to your car? A rental car? A repossessed car?

In all three cases, the answer is no.

You would need mechanical breakdown insurance (MBI) for repairs to your car that are not due to a covered accident, and thus not covered by collision or comprehensive coverage.

If your car is in the shop due an insured accident, then you would need rental car reimbursement coverage from your primary car insurance company in order to have coverage for the cost of a rental car while your car is being repaired.

Repossession isn’t covered, either. Gap insurance pays out only if your car is in a covered accident in which it is deemed a total loss. Then it will pay out the balance owed to your lien holder, after your primary insurer pays out the actual cash value of the vehicle.

Will gap insurance pay for the diminished value of my car?

No. The perceived loss in market value (diminished value) of your car after an accident is not covered by gap insurance. Gap insurance only pays out if your car is a total loss and you owe more to your lien holder than the actual cash value (ACV) settlement that your primary insurer pays out.

With diminished value, your car has been in an accident and fixed, but you are concerned that the car has lost some of its resale value. That is not something for which gap insurance would pay, and in many states your primary insurance will not pay, either, due to exclusions listed on your policy.

Does gap insurance cover car payments if your car is not a total loss?

No. Gap insurance pays only the difference between the actual cash value paid out for your vehicle by your insurer and the amount you owe to your lien holder when your vehicle has been declared a total loss.

Gap insurance does not pay your car payments (or pay off your car) in case of job loss, disability, other financial hardships or death.

Can I get gap insurance on a private loan or home equity loan that I used to buy my car?
Gap insurance does not work with mortgage loans, credit lines, balloon payments, personal loans or other types of non-vehicle-specific loans.

Will gap insurance pay for my down payment on a new car?

No. Gap insurance only pays for the balance on your current car’s loan or lease if your car is totaled out and you owe more than the ACV paid out by your insurer for your car. Extra monies for a down payment aren’t one of the benefits of gap insurance.

If I paid a high down payment, do I need gap insurance?

You probably don’t need gap if you put a lot of money down on your vehicle. If you are paying on your car each month and it depreciates at a normal, steady pace, gap insurance usually wouldn’t be needed.

Gap insurance is needed only if you owe more than the value of the vehicle because this coverage pays for the balance of the loan left after the actual cash value (ACV) is paid out after a total loss of the vehicle. To see if you need gap insurance, determine the value of your car and compare it to what you still owe. If you owe less than or the same as your car’s ACV, there is no need for gap insurance.

Why didn’t gap insurance cover my total loan amount?

Probably you rolled miscellaneous items into your car loan, such as an extended warranty. Your gap insurance strictly goes toward paying off the amount you owe on the vehicle itself.

You should not expect gap insurance to pay for:

Overdue lease/loan payments
Financial penalties imposed under a lease for excessive use
Security deposits not refunded by the lessor
Costs for extended warranties, credit life insurance, or other insurance purchased with the loan or lease
Amounts deducted by the primary insurer for wear and tear, prior damage, towing and storage
Carry-over balances from previous loans or leases
Equipment added to the car by the buyer, meaning that only factory-installed equipment is covered
Read more: Will comprehensive insurance cover my rims and body kit?

Is gap insurance transferable?

No. If you already had a gap policy in place, then normally that gap insurance would be voided out when you refinance a vehicle or trade for another one. Gap insurance also doesn’t cover carry-over balances on any loans you rolled over into a new car loan.

If you refinance your vehicle, you need to get a new gap insurance policy on it if you still owe more than it is worth. If you are trading or selling a vehicle, you can get a new policy to cover any newly financed vehicle.

If I bought my car outright, do I need gap insurance?

No. If you bought a car with cash, and thus don’t have a lien holder to which you owe money for the vehicle, there would be no reason to purchase gap insurance. Gap insurance is only for car owners who owe more than the value of their vehicles to a lien holder. Just keep in mind that GAP insurance rates vary substantially from company to company for basically the exact same coverage due to the risk profile and profitability of the company. Enter your zip code above and instantly see which companies usually provides the cheapest rates in your area.

Cost of Gap Insurance

To get the Gap insurance on your policy, it roughly adds 5 percent to 6 percent of the premium for collision and comprehensive insurance you have on the car. On a $1,400 annual premium — with $420 to $560 of that typically for collision and comprehensive — gap insurance would cost $20 to $30. And the cost goes down along with the cost of collision and comprehensive as the vehicle ages. So, for peace of mind, buying a Gap Insurance Coverage is definitely worth the little extra money it cost.

One of the biggest mistakes consumers make in buying car gap insurance is to buy it at the dealership where it costs more. It’s the belief that you can only purchase it from the vehicle manufacturer at the time of sale. The truth is that you can purchase it any time and insurance companies are less expensive when you are buying through auto insurance comparison sites like ours. We are a quote engine that analyzes and compares real-time auto insurance rates from “A” rated insurers nationwide. Our technology allows you access to the lowest rates so you can spend more time with your loved ones and less time thinking about whether you should have taken more time to compare additional providers.

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