Gap insurance, an acronym for “guaranteed asset protection”, is an optional type of car insurance that can protect you in case you total your car and the amount of compensation you receive does not fully cover the amount you owe on your financing or lease agreement. If the balance of your car loan is greater than the vehicle’s book value, gap insurance can cover the difference.
How Does Gap Insurance Work?
When your vehicle is totaled in a situation covered by collision or comprehensive insurance, the maximum claim payout from your insurer is the value of the vehicle right before the incident. Gap insurance, sometimes called loan/lease coverage, covers the difference between what you owe and the value of your totaled or stolen vehicle.
Here’s how a typical gap insurance claim works:
- If your vehicle is stolen or totaled in an accident covered by your auto insurance, you’ll make a claim on either the collision or comprehensive insurance portion of your policy (whichever coverage applies).
- Your insurer will pay your lender the actual cash value (ACV) of your car.
- If you owe more on your loan than the ACV, gap insurance can cover the difference.
Example of How Gap Coverage Can Help
Let’s say you have a car loan left to pay of $20,000, and the actual cash value of your car is $17,000. If your car is totaled or stolen, your insurance company pays the lender $16,500 (after deducting a comprehensive or collision deductible of $500). Without gap insurance, you would still owe the lender $3,000. In this case, gap insurance would cover the $3,000 still owed to the lender, so you wouldn’t have to find the money to pay that out personally.
When to Consider Gap Insurance?
Gap insurance makes sense if you owe more than the car is worth, such as if you didn’t make a down payment or if you chose a long loan term. It’s also worth considering if you plan to put miles on quickly, as the faster you rack up the miles, the faster you depreciate your car’s value.
Also Read: Why Is My Car Damage Settlement Taking So Long?
Conclusion
In conclusion, gap insurance is a valuable tool that can protect you from financial loss in the event of a total loss of your vehicle. However, it’s important to understand the specifics of your policy and to compare the costs of both options to see which one is the best fit for your needs.
