Gap coverage covers the difference between your vehicle’s payout amount received from your auto insurer and the remaining balance owed to your lender should your car be totaled or stolen. (Sidenote: contrary to what you might think, ‘gap’ is an acronym. It stands for ‘guaranteed asset protection.’)
To understand gap insurance, think of your vehicle as having two values: its depreciated value and its loan amount. Of course, insurers have a more technical term for depreciated value: they say actual cash value (aka ACV). ACV is the amount a vehicle might sell for after age and normal, everyday use. It’s the amount your auto insurer will pay if your vehicle is totaled from a covered claim. This amount is determined by your insurer at the time of loss and depreciates over time.
Your vehicle’s loan value is the amount you owe to the lender if you financed your vehicle. As you might expect, your vehicle’s loan value only matters to you and your lender. Without gap coverage, your insurance company is not concerned about what you still owe on your loan.
So gap coverage essentially closes the gap between your vehicle’s actual cash value determined by your insurer and the loan amount owed to your lender. For example, say your new car is stolen. You owe $25,000 on your auto loan, but you only receive $20,000 from your insurance company because of its ACV. In this example, gap coverage would pay the remaining $5,000 owed on the loan, so the loan amount is completely paid off.
All in all, gap coverage prevents you from making payments on something that’s no longer in your life. It can also prevent you from having to make two car payments should you replace your stolen or totaled car.
Gap insurance is generally an option to purchase if:
Most people have a misconception about gap coverage and think they can purchase it at any time. Contrary to public opinion, you can’t get gap coverage on any vehicle you finance.
Gap coverage should not be confused with ‘new car replacement.’ Gap coverage only covers the difference between your ACV insurance payout and the amount you still owe on a loan. It doesn’t have anything to do with purchasing a new vehicle.
Gap coverage activates when your vehicle is deemed a total loss by your insurance company.
Therefore, it would activate in such situations as:
Gap insurance does not apply if you are in a fender bender or the vehicle is dented by hail. To receive gap coverage, driving your car can no longer be an option.
As you likely know, there are many types of coverage options you can purchase to protect your vehicle. However, your coverages work a little differently to help cover costs associated with your vehicle, depending on the situation.
Gap coverage is a common coverage offered by car insurance companies, so you shouldn’t have any issue finding it. While you’re shopping for it, remember that it may be called loan/lease coverage.
Dealerships also often sell it, and while it may be easier to simply go with them, you might save money by working through an insurance provider. Dealerships may tack on gap coverage to the loan itself, but the problem with this is that you’ll end up paying interest on it. Some may allow you to prepay the gap coverage as a separate transaction.
Buying gap insurance is easy. Look around, and you’ll find auto insurance companies offering it. Some providers include: